There’s always a hot new “strike it rich” investment scheme making the rounds, and many of them change with the times. Multi-Level Marketing (MLM) schemes have existed since the 1920s, Beanie Baby millionaires were minted in the mid-1990s, and I’m sure every single person reading this article has been approached for the “opportunity” to take part in one crypto $%&# coin or another that we were promised would rocket to the moon like Dogecoin.

While get-rich schemes come and go, there is one investment that has proven beneficial for many centuries, but often requires more patience (and knowledge) than other investments: real estate. With wage growth currently failing to keep up with raging inflation, people today are finding new and creative ways to join forces with friends and family to get their feet in the door of the real estate market.

It’s funny because most data has shown that Millennials and GenZ have been the first generations to not have any interest in the traditional rites of passage like getting a driver’s license or buying their first home. As a dad with a son in Boy Scouts, it seems every week there is another dad sharing stories about his 16-year-old that doesn’t want to take driver’s ed classes while the kids do their thing at our Scouts meetings.

https://www.youtube.com/watch?v=jiiQRp6urIE

Millennials and GenZ do have a strong entrepreneurial drive, however, and are the generations that made “side hustles” a thing. It seems they would rather cobble together three income streams than work a 9-to-5 job at a desk, and I honestly can’t blame them. If you want to learn more about side hustles and how different generations rank in their side hustle-ness, you can read all about it in my article here.

It makes perfect sense when you think about it. 2008 threw more than just the stock market out of whack, as it changed the entire cycle of our economy in terms of working and retirement. The youth who graduated college in that time frame was hit with a major unexpected confluence of events that threw their lives off course.

The shock to the economy meant that nobody was hiring, but also that many companies that these fresh college grads would have worked for were laying off employees. So many 401(k)s took a walloping that an outsized portion of those within retirement age couldn’t afford to quit working as their retirement savings were gone. There were many stories of retired people even coming back into the workforce and taking menial jobs like bagging groceries that displaced high school workers.

Coming back to our current times, I’ve seen quite a few real estate industry financial analysts sounding the alarm lately due to significant overbuilding in the face of increased regulations, rising interest rates, and what seems to be an ugly recession coming our way. Will fractional real estate ownership be the thing that keeps the residential real estate industry afloat? Let’s dig in to find out.

What Is Community or Fractional Real Estate Ownership?

Fractional real estate ownership is a way for people to jointly own real estate by sharing the costs for both the purchase and the maintenance. There are many different ways that money can be made through real estate these days, with some being more difficult to do through fractional real estate ownership than others. Some, however, may not be interested in making money through their fractional venture and simply want to share a vacation home or condo in a desirable location with a group of friends to share the costs.

“Fractional ownership can lead people who are unable to own a home on their own to either start cohabitating and owning a piece of real estate together and to live as a community, or to be used as for investment purposes to reap the rewards from the growth of the real estate market, “says Leonard Kim of AdvisorCheck. “As many people in metropolitan cities are realizing that home ownership may not be possible on their salaries, they are turning to alternative ways to make it possible,” Leonard continued. 

There are two different types of fractional real estate ownership:

Joint tenancy: most commonly used by couples who want to have equal ownership of their property, joint tenancy is used when multiple people have an equal interest in and equal rights to property (everyone puts the same amount of money in, and has equally divided rights to the property). For a joint tenancy to apply there are “four unities” that must be met:

1. All owners must have obtained the property at the same time
2. All owners must have acquired the property by the same document (they buy it together)
3. All owners must share an equal interest in the property
4. All owners must exercise equal rights to ownership of the property

There is also a Joint Tenancy with Rights of Survivorship in which the shares of an owner who dies automatically go to the other owner or owners with no need for probate or legal battles. Wealthy people go to pretty great lengths to set their estates up in such a way as to skip probate when they pass away. If you don’t know what probate is, just know that it’s a pain.

The downside of this arrangement is that your ownership in joint tenancy real estate can not be passed along to your heirs or beneficiaries – they automatically are divided among the other owners. You may not care about this in your 30s, but it could be a significant issue in your 80s.

Tenancy in common: tenancy in common is another way to jointly own real estate that leaves a lot more wiggle room for the parties involved. The owners can each own different percentages of the property if they agree upon those percentages. New owners can be brought in after the original purchase, your shares can be bequeathed to your beneficiaries or heirs, and owners can even sell their rights to others (depending on the language of the contract).

The downside of a loosely-organized tenancy in common is that a group of friends could hypothetically buy a property together and have a falling out. If there is no contract agreement that all owners must approve a sale, they could end up in a business arrangement with people that they don’t know or like very much.

Likewise, ownership of the property may end up being bequeathed to family members whom the group doesn’t want to be in a business venture with. Imagine being 80 years old, losing one of your friends whom you purchased a property with, and having their ownership go to a 20-year-old nephew that is a party animal and trashes the place.

There is a great saying that “contracts keep friends,” so if you do opt for a tenancy in common agreement, make sure to write a solid contract that protects everyone’s interests and outlines what will happen in the event of any potential circumstances.

My Personal Experience with Joint Tenancy

A close friend of mine ended up in a version of joint tenancy through his family that showed me how this situation can be great at times, and not so great at others. This friend married into a family whose great-grandfather had purchased property less than a mile away from one of the most well-known national parks and built a cabin right on the river a very long time ago.

Grandad was an extremely competent craftsman, so the cabin still stands many years later, very much in its original form. Because it has been passed down through a family that has grown substantially, there are a large number of owners. They don’t use or intend for the cabin to be a business or moneymaking venture, but due to its prime location, every member of the family wants to use it for trips with their family or friends (it has several rooms and built-in bunk beds so it can house about a dozen people).

The family came up with their own time-sharing arrangement and decide among themselves when different members of the family can use it. The only real rules are that they only go when they’ve booked it for themselves, that they clean up after themselves and guests when they use it, and that everyone has to pitch in either financially or with sweat equity when the place needs fixing or improvements.

Rules are great, but people are fallible, some are lazy, and others never want to pull their share of the work while reaping more than their share of the spoils. My friend is extremely handy, so he makes the trek out to the cabin at least every month when it’s warm to make repairs or improvements (even though it's several hours of driving for him).

Despite his dedication to the place and its upkeep, from what I understand there are more than a few family members who never show up to do the work, don’t split the costs of even the supplies needed to do the work, yet are the first ones to book the weeks and weekends that they want to use it.

We also had a weekend during which my friend invited me and another family to spend the weekend at their cabin. It’s one of my kids’ favorite places in the world, so of course we loaded up the car and made the drive out there (it is also several hours' drive for us). Halfway into the first night, we were grilling fresh-caught trout for dinner when a dozen people showed up, knowing that it wasn’t their weekend but having decided to drop in anyway.

There is of course a difference between a group of friends buying a property for a business venture and a cabin that’s been gifted down through the generations, but the story highlights an important aspect of dealing with any group of people. Some will honor their obligations and ensure that they always pull their weight with the group, but others will not. Just pay attention to who you are going into business with and whether you can count on them to do their part.

Joint Business Arrangements Among Friends Are Nothing New

Groups of friends going into business together to help each other afford something that may otherwise be financially out of reach is nothing new. My ex-wife is Taiwanese, and her dad told me a story about how Taiwanese entrepreneurs will often get their start after graduating college and trying to get a new business off the ground.

He told me that he and his group of friends followed a tradition that they didn’t begin, but seems quite similar to the fractional real estate ownership scenario. Sort of like version 1.0 of crowdfunding, they would get a group of a dozen or more friends and classmates together to fund each other’s entrepreneurial ventures. Each member of the group would save a predetermined amount of money, and in the first month, they would all give this money to one member of the group, in an order that had been determined.

The next month they would all come together to give the same amount of money to the next friend in line, and so on until everyone in the group had received their “investment” from the group. This way everyone paid the same amount, everyone received the same amount, and it allowed them to get their hands on enough money at one time to get started in whatever business they had chosen to set out upon.

Much like fractional real estate ownership, they had to choose a group who they could trust, expect that each member of the group would step up when needed, and by doing so each member of the group could afford to do something that they couldn’t otherwise.

Fractional Real Estate Versus Timeshares

Is there a difference between fractional real estate and a timeshare? Yes and the difference is significant. With a timeshare, you don’t actually “own” anything, despite the sales pitch that you’ll be given when someone tries to sell you one. In fact, the difficulty that people have getting out of a timeshare agreement that they have signed is pretty well-documented.

I was actually on the receiving end of a timeshare pitch when I went on a vacation to Cancun, and I couldn’t wrap my head around how anyone falls for it. The pitch consisted of the salesmen trying to say that we’d actually save money based on the number of annual trips that my ex-wife and I took, but the amount of money that they were throwing out was obscene compared to hotel costs - even very nice ones.

The mistake that many make when they are talked into buying a timeshare (a mistake that the salespeople know is likely) is that people think they have some sort of ownership. The only thing that you own with a timeshare is the time in which you are allowed to use it, and it’s often not very much time. You have no say in how it is maintained, used, or sold. You won’t recoup any costs if it is sold, and while you can sublet your time to others, you often only have minimal time for which you can use it.

Fractional real estate, however, is actual ownership of the property among your group. It is up to you to maintain it, agree upon when each member of the group will use it (if it is meant to be used at all rather than purely as a business venture), and each of you will share in any revenue that the property brings in, either through rentals or sale.

Can You Make Money with Fractional Real Estate?

No investment is 100% foolproof, but there certainly is a way to profit from fractional real estate, when done right. If the real estate is meant to be a business venture rather than the sharing of a vacation home, it can be used as a long-term rental property, a short-term Airbnb or Vrbo property, a refurbishing project to sell for a profit, or any combination of these.

Real estate prices around most of the country have remained surprisingly resilient despite the higher costs of financing and mortgages with the increased Federal Funds Rate, but that may not last for very much longer. If I were going to go into a fractional real estate business deal with friends at the current moment, I’d make sure that our plan was to use the place as a rental until we pass through the oncoming recession rather than planning on flipping or selling it anytime soon.

Potential Disadvantages of Fractional Real Estate

Fractional real estate can be a great way for a group to afford their first real estate investment when perhaps they couldn’t individually, but it does have its drawbacks, disadvantages, and dangers. Let’s go through some of those below:

Difficulty finding financing

Fractional real estate is different than the traditional single-owner or couple’s home purchase, so finding financing can be more difficult. There are lenders who specialize in fractional real estate mortgages, but it may not be the bank that you’re used to using.

Squatters and scams

The laws in this country can be quite bizarre at times, and certain states offer very little protection to homeowners (especially in business ventures). In states like California, it can be exceptionally hard to get rid of a squatter on your property who moved in because they saw it was empty between renters. I’ve heard horror stories of people moving in as renters but then refusing to pay, and it took the owners up to six months just to get them evicted.

Likewise, there is a rash of scams going on around the country right now in which people who have zero ownership of properties advertise them, collect down payments, and even create fake contracts with unsuspecting tenants. If one of these scammers discovers that your property is empty between rentals they may advertise it on a site like Craigslist to people who are outside of the traditional rental market. Because of the Byzantine property laws in this country, it becomes very difficult to evict the people who fall for this, even though the entire thing is obviously a scam being perpetrated upon both you and the renters.

The scammers are, of course, long gone and hidden through a maze of shell companies by the time anyone figures this out, and both you and the scammed renters are left empty-handed. If this sounds too crazy to be true, read this Twitter thread by a real estate attorney who’s had to deal with squatters and the fake lease scam far more often than she likes.

The difficulty in dealing with groups

Even when agreements are made with the best intentions among a group of friends, sometimes life can get in the way. Someone may lose their job and have a hard time coming up with the money they are supposed to pay for the mortgage, maintenance, or insurance, while others may not pull their weight if time and effort were a part of the deal.

There often is no way to predict unforeseen events, as that is their very nature; they happen when least expected. Try your best to ensure that anyone you go into a fractional real estate ownership deal with is not overextending themselves and that they are people who you can trust to keep up their end of any agreements or requirements.

Other Unique Ways to Make Money with Real Estate

There are plenty of ways to make money in real estate if you are willing to put in the time and effort. It is more difficult to do on your own, as you need to either have the money to purchase or credit to finance what will likely be a large expense, but it can be worth it if you do your due diligence. Here are some of the other unique ways to make money through real estate besides fractional ownership.

Airbnb or Vrbo

If you can afford to buy property in a desirable location (tourist urban areas or vacation destinations), there is a lot of money to be made through Airbnb or Vrbo rentals. A friend of mine had always been interested in getting into real estate, and when he found himself in a job that required travel 75% of the year, he decided to start listing his South Lake Tahoe condo on Airbnb during his travels.

Within a couple of years, he made enough to buy a second condo and now has moved across the country and upgraded to buying apartment complexes. He also saved his money religiously because buying large properties had always been his goal, but it was the first condo on Airbnb that got him his start.

Arbitrage

Some people have chosen to make money in real estate by simply using the arbitrage between rental or leasing prices and what they can charge on Airbnb or Vrbo. While my friend mentioned above bought his first condo, there are a significant number of people now who will simply rent properties in desirable locations and then Airbnb them out to others, making money on the arbitrage between their rent and what they can bring in through short-term rentals.

Doing this can save you the need to put down the money for a mortgage, but may land you in hot water if the property owners don’t know what you are doing or forbid it in their rental agreements.

Foreclosed House Flipping

The greatest redistributions of wealth take place in times of economic turbulence, and foreclosed house flipping is a prime example. A college friend of mine was an accountant who worked for one of the Big 5 accounting firms after we graduated but soon realized that despite his education, CPA, and well-paying job, he absolutely hated being an accountant.

His father-in-law took my friend under his wing and began to teach him everything that there was to know about buying distressed properties, refurbishing them, and either turning them into rentals or “flipping” and selling them. The 2008 housing crisis came less than a year after he began learning these skills, and my friend used that to make an enormous amount of money.

Banks are often in the business of writing mortgages but not selling homes, and many banks suddenly found themselves with large portfolios of foreclosures. There are a lot of regulations that differ by state which prevent potential buyers from going on the property or learning very much about a foreclosed home. These foreclosed homes (at that time, in Austin, Texas) were auctioned off on the courthouse steps, and could often be purchased for far below what the actual value of the home had been.

Some tenants would destroy the home or leave with all of its copper wirings in hand, but for someone who can do the refurbishing on their own or have it done economically, there can be a good business in buying and refurbishing foreclosed homes to either rent or sell.

As it looks like we may be walking into another rather nasty recession, there may be an opportunity to break into the real estate business for those who have the resources to afford it and the willingness to do their due diligence.

Find the Right Advisor to Help You Build Your Portfolio

Real estate is well-regarded as one of the best investments that one can make over time and one of the few that has held up over the centuries (far better than Dutch tulips). While it can pay off extremely well for the right investments, there are also pitfalls to avoid, patience that is needed, and due diligence to be conducted.

Because of the long timeline that is often required, it also shouldn’t be the only part of your investment portfolio that you depend on. A wise investor will build their portfolio with a range of short, medium, and long-term investments, as well as different classifications of taxability, risk, and payout profiles.

Perhaps you aren’t at the point yet where you have the financial wherewithal to enter into a real estate investment, but you would like to get there. Studies have shown that a financial advisor adds at least a 3% extra return for the portfolios of investors versus those who choose to build their investment portfolios on their own.  Advisors can also provide you with access to investments and financial instruments that you can’t take part in on your own.

While you could just follow a friend’s advice for who to use as a financial advisor, or use the old-school method of picking a name out of the phone book (or the online version, Google), those who have the patience for real estate investments should perform the same amount of due diligence for their financial advisors.

Rather than having to scour search results on your own to find the right financial advisor for you, AdvisorCheck has put all of the research that you need into one platform. You can use AdvisorCheck to search for a financial advisor by location, name, or even their CRD number. Once you find one, all of the due diligence tools that you will need are right there, including their specialty, certifications, years in practice, average client portfolio size, and will even list if they have any disclosures on their record.

Can a Financial Advisor Help Me with Real Estate?

Finding the right financial advisor for your needs on AdvisorCheck can help you realize your dream of real estate investing in several different ways. If your dream is to buy a home, whether for investment or personal use, a good financial advisor can help you build a plan and portfolio that can get you there. Additionally, they can help you avoid investing pitfalls that the normal retail investor doesn’t know to avoid, keeping your nest egg and investments on track.

If want to build a budget, savings, or investment plan with the goal of saving up enough money to purchase real estate, a financial advisor can help get you there as well. Most people are amazed at the wonders of compound interest (which Einstein himself called the “8th wonder of the world”), and how small, well-placed and regular investments can grow to a sizeable amount of investible assets if properly invested.

Part of the due diligence for any real estate investment is looking at the numbers to realize whether a deal is as good as it’s made out to be. For a real estate investment as small as a condo or as large as a commercial office building, a Chartered Financial Analyst (CFA) is an expert at reading through numbers and proposals to decipher whether any deal is worth the investment. Finding a good CFA on AdvisorCheck is as simple as entering your location and reading through the results, and partnering with the right one to analyze and build your portfolio can pay massive dividends over time.

If you need to build up the funds to move into real estate investing as my friend did when he started in South Lake Tahoe, or if you already have the money but want an expert to help you find the right deals and build the best portfolio for you, AdvisorCheck is the resource that will give you access to all of the best financial advisors around the country.

Real estate investing is not for the impatient, but it can be well worth the time for those who are willing to assemble the right team around them. To find that team that can assist you in building your real estate empire, start a free account with AdvisorCheck today.

Written by Robert Patrick Lewis

Fact checked by Billy Quirk

Reviewed by KJ Kim

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