Fractional Ownership; Make Recreational Investment Properties Something For Everyone

Here is an article Steve Uhl from the Tropicante here wrote.  He knows a lot more about real estate than I do, so we were talking about some new condos here and how they would be a good investment for the future.

So he explained fractional ownership for me, and how it would be good for investments here in Mahahual.

Source:https://ahhhmahahual.wordpress.com/2016/05/27/fractional-ownership-make-recreational-investment-properties-something-for-everyone/

 

If you think owning vacation property in paradise is not something your middle class economy would ever allow, think again. When I was a builder in the US, I built recreational cabins in the mountains, where many people own vacation property, and do so with very modest incomes. You don’t need a whole lot of money, if you don’t own a whole lot of vacation property. Just own a piece of one, via fractional ownership, since that’s really about all you’ll be able to use it.

Before you start yelling at me, let me first explain, “fractional ownership” does not mean time share. They are two very different ways to own and enjoy recreational property. Time shares are set up to sell one week increments and really not a real estate investment. The truth is, they are at best, a way to get cheaper vacation accommodations once a year. Typically, units in a condo are broken up into 51 week intervals and sold as such. Each unit has 51 owners plus a holding entity of some sort, which owns the last interest. In the US, only 51 weeks a year can be sold as “deeded” property. So what you are actually buying is one 51st interest in a single condo unit. That’s not a real estate investment and I’m not aware of anyone who has sold a time share and received any appreciation.

Why is that? Do the math. If the condo is valued at say $150,000 and that is divided by 52 owners, the price would be less than $3,000. Most pay many times that for their timeshare and if the building were sold, your small interest would be nothing by the time you paid your share of the sale’s fees and so forth. The only one who makes anything on that deal is the administrators, or that 52nd unit owner from each condo. That is also who you pay your administration fees to each time you use it every year. And of course, they rent the un-used time for their profit and not yours. Hmmmm?

In the real world, what happens is a percentage of the “owners” eventually get tired of paying fees and just stop, writing off their “investment” because it was small and they could not sell it, allowing the administrators to “‘re-posses” the property and sell it again. Not unlike a used car dealer who knows they will get to sell the car again … and again if they are lucky. Time shares are the same. They may or may not be a good way to do your annual vacation, it is not for me to say. It is not however a good real estate investment, I will say that.

Fractional ownership though is different. It is real ownership in property that is shared with just a few people, and usually friends and family as partners. Most of the time, the interests are divided by 2-4 parties and the property is managed and administered by the owners themselves. If you bought the same $150,000 condo with 2 friends, your investment would be $50,000 but you would receive 17 weeks of use instead of one and when you went, you would not pay any fees. Lots of benefits to that.

As I say, in the time share arrangement, if you do not use your condo, you lose that week. Most do not let you rent your week, only exchange it for another place for the week. If you don’t use it, guess who gets the money. You got it, the administrator. In a fractional ownership method, your unused weeks can be rented and you get to keep the money. That is the way a real estate investment is supposed to work. It should make you money and not cost you money. If you can get some enjoyment out of it, so much the better!

So how do you do it? It is actually very easy and the typical way of ownership for foreigners, a Mexican corporation, works very well for fractional ownership. Your group simply sets up a corporation with each being a proportional owner, and the corporation owns the property. If one owner wanted to own half and two wanted to own quarters, one would get 26 weeks of use and the others would each get 13 weeks. Corporate papers can define use regulations and how the end sale is done, as well as any special arrangements each group wants or needs. Its your corporation, make the rules the way you want.

In those rules, you spell out each stockholders responsibility, such as proportional interest in maintenance, expenses and all the usual costs and benefits that go with property ownership. If the roof needs repaired, one owner pays half, and the other two pay 1/4 the cost. Proportional ownership is equal to proportional responsibility as well as benefits. You also can set how the weeks are split, as well as how rental incomes are handled. The process is very similar to the corporation apparatus and set up as what is used in the US, so most will be comfortable with this arrangement.

So what can you get by doing it this way. I’ll give a couple examples. Lets say you want to buy one of the new Aqua Star Condominiums being built right now in downtown Mahahual.

Aqua-Star-vista-desde-la-playa

These are going to be one of the many very nice, new condos going up all over these days. This happens to be my favorite because the location, units and amenities seem a notch above the others. They have 2 bedroom units for just under $200,000 USD, so by the time you do your corporation set up and closing costs, your final total will be around an even $200, 000. The units have nice finish packages and all have balconies that overlook Mahahual’s downtown beach and Caribbean oceanfront.

aquastarhotel5-costamaya

This makes it an easy example. If 4 people buy a unit together, each will pay about $50,000 USD and will get 13 weeks a year of use. Most investors are happy to make 10% on their investments, so if you have $50,000 invested in your unit, you need to make about $5,000 a year to do that. New condos rent for close to $2,000 per week on he malecon, so you need to rent your condo for about 3 weeks a year to make your 10%. Most have friends who will rent it that many times a year, so filling un-used weeks is easy. Add the real annual appreciation a typical property increases, usually around 5%, and the investment becomes even better.

Aqua-Star-vista-aerea-total These condos are right on the downtown beach and as I said, have the very best amenities offered in the town. Only 11 units total share 3 pools, a bar/restaurant, and even a small hotel, so when over flow friends show up, they have a place to stay. The rental rate right now for like units in the area start at around $1,500 per week and go up from there. And if you rent your unit, unlike the time share, that is your money!

$50,000 USD is not a lot, but it is still more than many want to spend, so you need to do one of two things. Either find another partner, or find another property. There are little casitas, houses, that are a few blocks from the ocean, that sell for under $75,000 USD. If your group bought one of those, a 1/4th interest is less than $20,000. Who doesn’t just have that much laying around doing nothing? You might as well buys some fast appreciating real estate, and one you can enjoy in the process.

Think of it this way. Each quarter, or once a year, you get a statement from your investments and if you are lucky, you might get 4-5% of appreciation each year. Then what do you do? You then take the statement and file it away in a drawer, or even worse, toss it in the trash. Most real estate appreciates at least that much, recreational property can go much higher than that even. However, instead of a paper once a year, you get a beach house. Try filing that away and see how much fun you’ll have doing it!

If you need more info on Aqua Star, or fractional ownership and how it works in Mexico, contact me. What I can’t explain, an English speaking friend, who is also an attorney here can help you. She can help with consults before you buy, as well as with the purchase and corporate set-up.

So if you like to vacation in the tropics, and think you might want to invest a little in some real estate in the process, consider fractional ownership as an easy way to do that. Get your friends together, buy a piece of paradise, and have some fun with it. Sure beats a statement every so often!

Thanks for reading,

Stewart Rogers USA-South Carolina

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