Fractional Homeownership: Is This the Future of Owning a Home?

The 2024 Santa Barbara real estate market is off to an interesting start. After being named the #1 emerging housing market in the U.S. , a recent report indicates that homeownership across the country is starting to look very different. Low housing inventory and high mortgage interest rates have served as a major barrier to entry for many first-time homebuyers. We'll explore this and what it means for buying a home in Santa Barbara.

What is fractional homeownership?

In the chaotic housing market that is 2024, many are currently shut out of the housing market. This hasn't stopped some from becoming homeowners, at least on a part-time basis. "If you can't find a full-time job, a part-time job is sometimes an option. This is the equivalent in terms of owning a house" says economics professor Michael Miteza of The University of Michigan. Fractional homeownership is exactly what it sounds like; you own a house and use it as your primary residence for a set amount of time throughout the year, and then essentially switch out with the other part-owners.

Leave it to investment companies to come up with a unique way for people to buy a house. Leading the charge in this new endeavor are firms like Pacaso and Lofty, which invest in properties and then sell "shares" of the home to either residents or investors. These shareholders then either use the rising home value to increase their portfolio or, in the case of non-investors, live in the home part-time.

Essentially, fractional homeownership is a more vested form of a timeshare or even a VRBO. But rather than rented by owner, the property is owned in whole by investors in the property itself. 

Does owning a part of a house make you a homeowner?

The answer is "it depends." In some cases the investment in fractional homeownership is direct, and you are a deeded owner of the property. In most cases, however, the company that you purchase your stake through is the real owner of the house. So why do this?

For some, it is the best and easiest way to enter the housing market. For others, it is a more passive way to enter the real estate investing world. Investors essentially purchase a fractional ownership stake in a house, and then the investing company rents the property out. As these properties appreciate in value and rents increase, the investors collect dividends. 

Tech companies have been involved in the housing market for some time. Whether it is a platform like Offerpad that does direct homebuying or companies like Zillow that are leveraging technology to hold onto their large footprint in the Santa Barbara real estate market, more of these large companies and investors are entering the housing market.

What is the risk of fractional home ownership?

The biggest risks are in the property itself. Retail investors will need to know if they are buying a share of the home itself or a security product created by the investing company that is backed by the property itself. This changes the game dramatically, as shareholders may not always have a say in how the property is managed or when it’s sold, and if market conditions change or it sits without a tenant, their investment could fall into the red.

The variations in interest rates can make this type of investing very risky. As one Miami-based fractional ownership company, here.co, learned when it had to shut down in January, citing the interest rate environment as not tenable for their business model. Because of the different structures of the companies, investing in this manner will require deep investigation to ensure you are not putting a portion of your money to the wind. As here.co investors learned, they could not get their initial investment back until all of the homes here.co owned were sold off. Pacaso investors, however, can freely sell their shares to others in order to recoup losses or pull out of the investment entirely.

Should I buy a home as a fractional owner?

Again, the answer is "it depends." If you are looking to dip your toe into the investing market, this is a fairly low-risk way to do so. Of course, that all depends on the size of the investment you want to put out. It isn't advisable to ONLY invest in fractional homeownership, but it can be a nice addition to a portfolio. If you're managing many rental properties, having a few shares in something that is low-maintenance could help.

For those looking for a place to live, think of it as a better version of a timeshare, without the nebulous contracts that timeshare companies lock members into. 

Buy a house in Santa Barbara

Of course, a top selling Santa Barbara Realtor can assist you in becoming the full and sole owner of your own home. Even in a difficult market, Maureen McDermut is helping clients find the home of their dreams and getting offers accepted. Contact Maureen if you're looking to buy a home in Santa Barbara.