Resort real estate has become an increasingly popular investment asset class in recent years. With the rise of fractional ownership models, investing in luxury resort properties is no longer limited to ultra high net worth individuals. Smaller investors can now purchase shares in prestigious hotel and resort developments for much lower capital outlays. However, fractional resort ownership also carries certain risks that need to be evaluated. In this article, we will explore the benefits and risks of fractional resort real estate investment, helping investors make informed decisions.
Fractional resort ownership increases accessibility
Traditionally, investing in entire vacation ownership properties required millions of dollars in upfront capital and substantial ongoing expenses. Fractional models allow investors to purchase shares equating to a few weeks of annual usage rights. Minimum investments can be as low as $50,000. This opens up resort real estate to a much wider pool of investors. Smaller investors can gain exposure and diversification into the hospitality and leisure sector.
Shareholders gain valuable usage rights
Purchasing a fractional interest in a resort entitles shareholders to a fixed amount of annual usage rights. Owners can visit the property during their allotted time periods, often staying in their designated unit. Alternatively, they may rent unused time to generate rental income. This combines an investment with personal vacation benefits.
Professional management handles operations
Reputable fractional resort developers handle all aspects of operations and management. Investors do not have to concern themselves with issues like maintenance, housekeeping and rental program administration. This removes a major burden associated with direct vacation home ownership.
Liquidity via resale markets
Many fractional resorts have resale platforms that provide share owners liquidity options. Investors may be able to sell their shares if they no longer wish to use their allotment. However, finding buyers is not guaranteed. Sales prices also depend on prevailing market conditions.
Leverage and economies of scale
Developers creating large, luxury resort projects possess significant advantages unattainable by individual investors. Their size, expertise and leverage result in economies of scale and more profitable operations. Fractional owners indirectly benefit from these efficiencies and professional capabilities.
Vulnerable to tourism market cycles
While promising long-term growth, hospitality and leisure is highly susceptible to economic and tourism cycles. Reduced travel demand during recessions will negatively impact resort valuations and profitability. Particularly in isolated, resort-dependent regions, prolonged downturns can be devastating.
Illiquidity and exit risks
Fractional resort resales lack regulatory oversight and formal exchange structures. Sparse secondary markets with limited transparency heighten illiquidity risks. Forced sales may require accepting large discounts. Additionally, defaults by co-owners can put properties into litigation limbo.
Opaque and complex ownership structures
Fractional resort investments often involve opaque, multi-tiered ownership structures spread across trusts, companies and jurisdictions. This complexity makes proper due diligence challenging for average investors. It also creates potential pitfalls regarding legal rights and claims.
High upfront and ongoing costs
Despite lower entry prices, fractional resorts still require large upfront outlays. On top of purchase costs, owners must pay annual maintenance and assessment fees. These recurring expenses for unused time can make fractional ownership financially unviable.
In summary, fractional resort real estate investment offers increased accessibility to luxury vacation properties, but also comes with substantial risks regarding exit options, cyclical demand and opaque ownership structures. Investors should carefully assess their risk tolerance and long-term objectives before committing capital to fractional resort projects.