Coastal Dreaming

Fractional Ownership offers investors yet another option for owning an investing in foreign real estate.  Some will say that fractional ownership properties should remain a luxury item, there are ways to use this vehicle to make investment returns.

What exactly is Fractional Ownership?

Just like the name implies, fractional ownership allows you and a group of other individuals to own a percentage of an investment.  It allows for power in numbers, by pooling resources to buy into an investment that you could not afford by yourself.  Second, it also helps you distribute the risk of the investment across a group to avoid the ‘all eggs in one basket’.  In essence it can be a diversification strategy for you.

How is Fractional Ownership Different than a Timeshare?

Unlike a timeshare, where you merely purchase the “time sharing” aspect of someone else’s property, in fractional ownership arrangements you purchase the equity in the property - you are the owner.

How do you set up a fractional ownership?

First, you will need to have a real estate attorney to draw up a legally binding agreement.  As a group there are a number of things you will need to decide upon.  Such things as, who has the decision making power, property upkeep and maintenance, disposition of shares etc.  Here is an article listing 10 items that need to be worked out when setting up a fractional ownership investment.  However likely the biggest decision that needs to be made is about the use of the property.  Are the partners involved because they want a fractional vacation property or is it purely an investment (that it will not be used by the owners for personal use) or somewhere in between.  This will be important when making decisions about the investment, and future stability.

Could I use IRA money to invest in a fractional ownership property?

Fractional ownerships are allowed under the self directed IRA investments.  Obviously the property could not be used as a personal vacation property and would have to be rented out.  With this model, just like other self directed investments, money from the IRA can be used to finance, or purchase your share, it can be used to pay your share of the expenses and it will receive your share of rental income or equity sale.

What about fractional ownership in Nicaragua?

Nicaragua has an advantage over countries such as Mexico (where fractional’s are booming) when it comes to the legal basis of fractional ownership.  With a simpler legal system and an environment where foreigners can own land with fee simple title, fractional offerings are set to flourish.

There are already a number of successful resorts set up on a fractional ownership model, whereby investors are buying dwellings that exist as part of the resort.  They are made part of the rental pool when the owner is not around.  Plus, these investors can take advantage of Law 306.  Since the property is serving the tourist industry the majority of the year, it becomes a 100% tax deductible investment to build and maintain for 10 years.  Plus the property is managed by a competent staff that will ensure it is maintained and rented in your absence.

In the end, fractional ownership is just one of many options you have for foreign investment in Nicaragua or other central American countries.  Your circumstances and investment goals will determine if it is a fit for your portfolio and long term goals, but having tools in the tool belt coupled with the knowledge about how they can be used is the important part.

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Tags: foreign, investment, options