For years you’ve enjoyed renting a vacation house with extended family or friends. One thought keeps recurring to all of you: What if we go in together to buy our own vacation home? It sounds heavenly! But before you take the plunge, consider these important questions.
Who pays what?
The first practical consideration when buying a vacation home with others is how you will split the costs. Before you start looking at houses, it’s important to work out how you will split the purchase price as well as ongoing operating costs such as utilities, taxes and insurance, homeowners association payments and the like. You and your friends or family members should also decide who will manage paying these obligations.
It’s also important to decide in advance whether the property will be used as a short-term rental. If everyone agrees they’d like to rent the property, you still must discuss how you will manage bookings and have the property cleaned between rentals, who will handle repairs and other issues. Will you try to manage these responsibilities yourself, or hire a management company?
The legal questions regarding a vacation home
It’s advisable to consult a real estate attorney to help you answer key questions when buying a vacation home with others. How the property is titled is a vitally important issue. Which individuals will have their names on the deed, and how will they share ownership? These decisions affect not only ownership now but changes in ownership later. When buying a vacation home with others, ownership is often set up as “tenants in common,” which means that if an owner dies, their portion passes to their heirs. But if you and your co-owners consider the vacation home to be investment property, you may want to consider having all the owners create a limited liability corporation (LLC) to purchase it. An LLC provides certain protections regarding taxes and liability for injuries to others while on the property.
Availability for use
Be sure to determine in advance how often each owner will get to use the property and when. If you plan to rent the property out, also discuss what times of year you will make it available for rent. It’s important to answer these questions before buying a vacation home to prevent misunderstandings and disagreements down the road.
When one party needs out
You and your co-buyers may think you’ll own the home together for decades. But life happens, situations change and an owner may need to sell unexpectedly. It’s crucial to talk in advance to create a predetermined exit contingency plan.
Will one or more of the other owners be able to afford to buy the share of the departing owner and take on the additional operating expenses? If not, would you be willing for a third party you may not all know to step in as a buyer?
Your written agreement between the parties should include a clause giving the remaining owners the right of first refusal to purchase the share of a departing owner. The remaining members should also have the right to reject a proposed outside buyer.
Related – Making Money on a Vacation Rental