This article in the Philadelphia Business Journal highlights the structure of the fractional home sales model: https://www.bizjournals.com/philadelphia/news/2024/02/03/jersey-shore-fractional-home-sales-avalon-stone-ha.html. The article is by reporter Ryan Mulligan, and it was published on Feb 3, 2024. The title is: With Jersey Shore home prices soaring, owners are now selling fractions of their houses.
Excerpts from the article include:
For Charlie Szoradi, who is selling two shares of his home in Stone Harbor worth up to a total of 20%, the model is a lot like carpooling. It’s an efficient way to get everyone to their destination at a lower cost, but he still gets to do the driving. With fast-rising summer rates for weekly Shore rentals pricing out many families, and with a house that isn’t being used every week of the year, Szoradi sees an opportunity.
Szoradi said fractional ownership gives people a chance to own on exclusive Seven Mile Island, which comprises the towns of Stone Harbor and Avalon, with a return on investment that includes spending time at the home and a chance to eventually benefit from the booming Jersey Shore real estate market if the house is sold. For him, the arrangement provides an influx of cash from the fractional sales while retaining control over the property.
Here’s how the model works: For buying 10% of the property at $339,000, a fractional owner gets an annual allotment of $25,425 — or 7.5% of their investment — to put toward renting the home for vacations throughout the year. Rates for one week at the house during the peak summer season push north of $15,000, so a fractional owner could take one of those weeks and have the remaining money to spend on other days over the course of the year. As rental rates inevitably rise on the island, Szoradi would increase the value of the allotment to keep pace.
The two fractional owners would get first choice on their rental days during the year, then Szoradi would rent the remaining days out or use them for himself.
Owners can also forfeit their vacation time at the home and opt to take the 7.5% as a dividend each year, or they can pay more for additional time if the rental costs for the days they want in a given year exceed their allotment.
Beyond the article: Distinction from Timeshares
This fractional home sales opportunity has key financial benefits for investors and other distinctions from traditional timeshares. The investment is not in the property but in the company that owns the property. The company commits to paying an annual 7.5% return on investment (ROI), and the investor can choose to receive all or a portion of that annual return in dollars or fair market rate rental time, in any given year at the investor’s discretion. The house serves as the collateral on the annual yield. In addition to spending time at the house, the investor gets the added potential upside of a pro rata share of the sale of the house, if and when it sells in the future. The investor can also choose to sell their share at anytime. The fractional ownership model is intended for families who enjoy the particular vacation place each summer and do not want to just keep paying rent, that is often increasing each summer. As rental rates increase so does the proportional yield on the investment.
In the unlikely event that rental rates go down, the investor benefits, because they get more time at the house from the 7.5% ROI allocation. The Stone Harbor, NJ house referenced in the article has been fully booked for recent summers as well as a surprisingly high portion of the offseason. Across the U.S., vacation houses and other real estate properties have appreciated over many decades as population has continued to increase. Fractional ownership, like this structure, is not an investment for everyone, but it is a way to put money to work. This website includes videos and more information about the Stone Harbor, NJ house referenced in the article: https://www.oasisstoneharbor.com/
This fractional home sales model is a new paradigm relative to traditional time shares, because of the dividend that investors can elect to take in cash versus time at the property. If a timeshare investor does not want to use their assigned week, then in many cases they would have to leave it empty or rent it out. Empty real estate is a wasted investment, and renting takes time and may not yield the desired results, especially in a down market season. With the dividend option of the fractional ownership structure, the investor can choose to use the property, rent their time, or they can automatically choose to receive the dividend. This streamlines the process and is intentionally an investor friendly benefit over a traditional timeshare. As well, with this fractional home sales model, the investor is not locked in to the same week each year. With a limited number of investors, there is significantly more flexibility for scheduling options. Overall, this fractional ownership model is intended to improve the traditional time share model and “make the wheel rounder” for investors.
Historically, affluent investors have often had advantages in other areas, such as the stock market. Having significant resources allows for stock diversification, and access to some investments with financial minimums, prices many investors out of the opportunities. The innovation of mutual funds is an example of paradigm that “made the wheel rounder” by allowing less affluent investors to get some of the advantages of those with more resources. The fractional home sales model is designed to give investors the opportunity to participate with mutual advantages.