Do you and a friend enjoy going to the same beach, ski resort or vacation hot spot? Have you ever thought of sharing a vacation home with a friend? There are good and bad points to owning a vacation home — or any other real estate property — with a friend.
In this article we are going to explore the good, bad and ugly of partnering up with a friend when buying real estate.
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The good part of buying a vacation home with a friend is that you can split all the costs of ownership. This includes the buying price, the monthly bills, annual taxes, insurance premiums, and any upgrades you desire to do with the property. Splitting the cost with a friend is definitely a huge benefit.
Another huge advantage is that if the friends have children around the same ages as yours, then more than likely, the parents will buy things for the children to play with that will stay at the vacation home. This will save the parents money and the headache of always having to pack a bajillion toys, balls, and bats when going on vacation.
Another advantage with more than one family owning a vacation property is that it will be used a lot. The more times the families are in the house, the better they can look after and repair small items before they become big items.
Sharing anything with a friend always has the opportunity to turn ugly quickly. Then, you also have the added burden of collecting money from the other party if something is broken and needs to be repaired.
The truth is that we always think we know our friends, but how well do we know their financial positions? Are they living high on the hog and robbing Peter to pay Paul? Are they current paying all their obligations? How liquid are their assets?
These are all question that most friends don’t discus with one another.
4 Tips for Those Considering Buying a Property With a Friend
If you are going to purchase a property with a friend, here are a few suggestions:
1. Create a Written Agreement
Sit down with your friend or friends and write up a set of bylaws that each partner must agree upon.
This agreement should include how the weeks are split up amongst all the partners, how disputes are to be handled, how expenses are to be managed, and how to deal with damage done to the property by another partner or by a renter who rented from the other partner — in other words, you should have a road map on how to handle most situations that are going to come up later.
2. Talk to an Attorney
I strongly recommend taking the title as “tenants in common” or forming an LLC. The best way to decide what is best for you and your partner is to seek the advice of an attorney.
An LLC will provide a level of protection to all the partners, and I would definitely consider this if you are taking out a loan to purchase the property. Again, an attorney should be able to advise all the partners on what to do if someone defaults on a loan payment they were supposed to make on the property. This is where an LLC will protect the other partners and keep them from losing the property entirely.
3. Set Up an Escrow Account
I would definitely set up an escrow account, and all the partners should fund the account enough to pay the bills on property for the next 6 months. This account should have enough left over to cover any unforeseen expenses.
By setting this account up, you will keep one partner from always having to run to his or her friends to ask them for money every month to fund the vacation home. It’s funny how money can change a friendship.
4. Plan Your Exit Strategy
Before you purchase the property all the partners should discuss what each other’s goals are for the property, and there should be an exit strategy discussion.
Here is an article I wrote a few weeks back that talks about fractional ownership, and one of the major downfalls is trying to sell. Both partners should be on the same page, and trust me, it is much easier to have this discussion BEFORE you actually purchase the property.
All in all, I would not recommend purchasing a vacation home with a friend; there are just too many things that can go wrong that would ruin the friendship. However, we manage quite a few vacation homes that have more than one owner.
Now it’s your turn! Would you ever buy a vacation home with a friend, or do you think business and friendship don’t mix?
Please feel free to leave a comment below with your thoughts!