You want a lodge in the woods, a cottage by the sea, or a chalet by a ski run. But vacation homes are expensive, and who has the time to care for a second home in addition to a primary residence? So, here's an idea: Split the financial obligations with a friend or family member!
We've talked about why this might not be the best idea for a primary residence, but vacation homes are different. After all, you might already be commonly renting a vacation place with said friends or family. Or you could take turns using the house, so you don't actually overlap.
Still, this approach can also turn into an express lane to disaster if you don't navigate the relationship with care.
Don't panic! Before you sign on the dotted line, here are some questions to ask that will protect your finances and also leave your ties of family or friendship intact.
TIC or LLC?
Ownership of property by two or more parties who aren't married -- relatives, friends, makes no difference -- can be set up as tenancy in common (TIC) or as a limited liability corporation (LLC). And while setting up an LLC will entail a tad more paperwork and a couple of hundred dollars in extra fees, it's well worth it, says Jennifer Bales Drake, head of the real estate practice group at Becker & Poliakoff. With an LLC, "you're treated like an individual for tax purposes, but with the protection of a corporate liability shield."
Why this is important: Under a TIC, someone injured while in your shared home could sue you and your co-owners for all you're worth. Plus, since you own a home with someone else, you have less control over who's allowed in. So if your niece wants to celebrate her sweet 16th with a blowout party on your property, and someone steps on broken glass, it could come back and bite you. This is much less of a risk if you opt for an LLC.
Who's responsible for what?
Another reason to set up an LLC instead of a TIC: LLCs are often required by law to create an operating agreement. Drake suggests having a lawyer draft an agreement "that sets forth exactly everyone's ownership interest."
That ratio, be it 50:50 or 80:20, will determine how costs such as insurance and real estate taxes are divided. It should also detail "who the manager of the property is, how the maintenance is going to be performed and paid for, and capital improvements. It gives [owners] a guideline so that everybody knows -- before they even own the place -- what the parameters are."
Think of this as real estate prenup, there to help things run smoothly and head resentment off at the pass. Otherwise underdiscussed issues -- such as who cleans out the gutters or closes up for the season -- can quickly turn emotional.
Who gets which weekends and holidays?
People buying a home together should ask themselves if all parties plan on being there at the same time, or alternate in using it, since vacation homes generally have a prime time of only a few months.
"Usually, everybody wants to go at the same time -- like over school breaks," says broker Cara Ameer. Not talking about this beforehand can lead to everyone showing up on the same day -- which is not exactly the relaxing vacation home of your dreams.
If you decide to split, work out a yearly schedule well in advance and consider rotating who gets major holiday weekends. Agree that changes and swaps can be made only with the permission of all parties.
To rent or not to rent?
Sometimes a vacation home is going to be empty no matter how many people own it. But you're a neat freak and don't like people sleeping in your bed. Your brother, on the other hand, wants to make some money by renting out your shared property.
It's important to hammer out whether to rent out the home "to generate income when you're not there," says Ameer. If all parties agree to rent, just make sure "where you're buying will allow that. Certain communities don't allow short-term rentals."
What happens when we die?
Another grim but crucial step before you sign on the dotted line: Discuss whether the home is an investment to be sold at a mutually agreed-upon time, or a respite to be enjoyed for generations.
Also, here's yet another reason where an LLC can come in handy: With a TIC, the ownership automatically passes to the co-tenant's heirs. Sixty-somethings who like to read quietly by the fire could find themselves sharing a house with their deceased co-owner's 20-something kids who want house parties.
An LLC, on the other hand, specifically sets forth who can inherit a co-owner's share of the vacation home.
"You can say if you pass away or want to sell, the other owners get the right of first refusal," says Drake. That helps all family members involved in this deal have a say, even after they're gone.