Fractional Ownership and its Implications on Real Estate

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Is real estate becoming too expensive for you? Is buying a home beyond your budget? Would it be interesting to buy a portion of the apartment? Fractional Ownership is concept popular with commercial properties but today is picking up steam in residential projects as well.

Salaried individuals and small business owners who don’t want to take a loan are now joining up to gain ownership of real estate. The big-ticket investments in fractional ownership are in commercial and retail spaces. The investment pool is larger, and the risks are also heavy in this form of investment. Leasing agreements are also stringent, and returns are heavily dependent on location of the commercial or retail property. This has led to a rise in interest in residential projects.

Types of Fractional Ownership

The property can be owned in various formats by individuals or Special Purpose Vehicle Firms. A few options are

  • Pay to Use – The owners themselves use the property and pay a usage fee for each day/week or month of usage. The property may also be rented to non-owners on a short-term basis
  • Usage Assignment Approach – Each owner has a specific number of days for which he can use the property. For that period the owner can use it himself or rent it out.
  • Long Term Lease – In this the owners lease out the property for a minimum of 11 months.

How is this organised?

In investment platforms, you can find properties for investing into. The platform will also put together other investors who are interested in the property. If there are less than seven investors, then they can each invest into the property as individuals. Generally, if there are more than seven investors a Special Purpose Vehicle firm is created, and all the investors become shareholders. Their ownership is determined by the amount of shares they hold. The entire arrangement will be legally binding with an agreement that details your fractional ownership. Exit from this venture will also be possible by selling off the share you own. Liability is also limited to the amount of capital investment made by you. All existing tax rules will apply for purchase. The monthly rentals will be divided as per shareholding pattern.

The Money Factor

The money investment can be direct without taking a loan. Since these schemes are not eligible for home loans, if you are taking a loan it would have to be a personal loan. The rental income credited will be after deduction of taxes and maintenance charges. Long Term Capital Gains will apply if the property is sold after 3 years and as per the Income Tax slab if sold within 2 years.

The single biggest challenge which Fractional ownership will have to face in India in the real estate sector might be from Real Estate Mutual Fund (REMF). Consequently, there is no reason for fractional ownership to be unsuccessful. Therefore, it is the appropriate time to take positive steps in seizing the best opportunities available.

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Fractional Ownership, what it is and models!
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Fractional Ownership, what it is and models!
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