This is something rather interesting as how is it possible for aircraft to have any relationship with real estate? First we have to understand what is fractional ownership. By definition, it means you get to own partial of any property by purchasing a number of shares offered by a company.
The history of fractional ownership as described in Wikipedia as follow;
The term fractional ownership originally became popular for business jets. Richard Santulli of NetJets pioneered the concept of allowing businesses to purchase shares in a jet to reduce costs. With a fractional jet plan, members will typically fly in any jet available, not necessarily the one in which they own shares. The management company will reposition jets as necessary and provide flight crews. Companies with greater needs purchase larger shares to get access to more time.
The fractional ownership concept has since been extended to smaller aircraft and now has become common for single-engine piston aircraft like the Cirrus SR22, which are beyond the financial means of many private pilots. The same concepts apply, except that the management company may not provide flight crews nor reposition the aircraft.
Many pilots get together to buy light aircraft in a privately bought and managed fractional ownership, this is often known as group flying.
Fractional ownership has played a significant role in revitalizing the general aviation manufacturing industry since the late 1990s, and most manufacturers actively support fractional ownership programs.
This concept was started in aviation but slowly the same was introduced in real estate.
Fractional Ownership in Property
At the point of writing, fractional ownership is not common in Malaysia. However, it is common in western countries such as United States and Canada.
Fractional ownership is not the same as Real Estate Investment Trust (REITs). You can read more about REITs as alternative investment here.
Some of the major differences between Fractional Ownership and REIT below:
| Fractional Ownership | REIT | |
|---|---|---|
| Investment Choice | Investor can choose which property to invest individually based on location, type, price etc. | Investor invest in the REIT company that holds all assets under one roof. |
| Type of Property | Any type of property | Usually property that are completed and generating income. There are times where the asset has to have minimum requirement for occupancy rate within the building. |
| Regulation Requirement | Privately owned and not subject to the rules and regulations from regulators. | Highly regulated by regulators. |
| Distribution | Subject to the terms when the investment is drafted. No standard requirement. | Must distribute not less than 90% of the net distributable cash flow. |
What is Fractional Ownership and its Advantages
It is a property that shares with other shareholders in certain proportions. It is usually an investment rental property rather than co-ownership for own stay. Typically, the property holds under a company. The concept in property comes first from the United States, the popularity of this property model becoming increasingly popular due to rising property price in major cities around the world.
Here are the advantages;
Easy Entry
Not everyone can invest in a whole property as it requires substantial down payment. With this scheme, the investors only need small capital to get started.
Regular Income
Depending on the terms, investors will get income from the rentals collection. The payout distribution can be every month, quarterly or yearly.
Resell
You can choose to resell your share to any interested party before maturity. But of course, there will be come terms and conditions apply for example the lock-in period.
Less Hessle
Most Fractional Ownership is managed by the company/team that offers it. There is no involvement needed from investors.
Exit
Typical property under this scheme has a set of time for resale. This can be five to fifteen years depending on the initial terms.
Conclusion
In my personal opinion, it is great tool for investors to get started in real estate investing. Unlike traditional investment in property, investors would need to get financing from the bank and at the same time increasing the risk for building up debt. Unfortunately, there is no fractional ownership in Malaysia at the moment. Retail investors can either invest via traditional way by getting the whole property or REITs.
If you want to learn my method on how to find investment property with rental income, check out my Best Time to Invest in Property book here.
