Owning a home away from home can add some significant value to your portfolio and your ROL. A second home can be an escape, a change of scenery, a place to immerse yourself in specific interests, sports, or hobbies, or the focal point of meaningful get-togethers for generations to come.
But if you can't make owning a second home work on your own, should you consider sharing the costs, responsibilities, and space with another family?
While the logic might seem compelling, sharing real estate will add a complex business arrangement to your friendship. Make sure you and your prospective co-owners talk through these three important issues.
1. Sharing the Dream ... And the Costs.
Think about all the financial responsibilities you currently have as a homeowner. Mortgage payments. Property taxes. Insurance. Utilities. Maintenance.
Now ... double them.
If you can also "double" your financial position by teaming with a co-owner, those bills might be a bit more feasible. You might also be able to share your purchasing power and buy a real dream home that neither of you could have afforded on your own.
Shared ownership is also an opportunity to create more shared memories. A home that can accommodate both of your families during holidays, vacations, and weekend getaways could bring your families closer together.
2. Staying Friends ... and business Partners
While sharing sunsets and holiday dinners at home with friends is appealing, the reality is that co-owning property can strain even the strongest friendships. Disagreements that might seem trivial in other contexts can escalate when a significant financial asset is involved.
It’s essential to honestly assess some potential challenges, including:
Differing Financial Situations: Even if you split all costs 50/50 it’s likely that you and your friends aren’t perfect financial equals. What happens if one partner loses their job, faces a divorce, goes through bankruptcy, or simply can't afford their share of a new roof?
Scheduling Conflicts: Both families won’t want to spend all of their time together. Who gets the house for the Fourth of July and the fall Holidays? What about peak skiing or fishing seasons? What’s the guest policy? Are pets allowed? Are you going to rent the property when neither family is using it?
Varying Standards: Your “cozy and rustic” might scream “Renovate now!” to your friends in a couple years. Differing tastes can lead to difficult conversations about what constitutes a mandatory shared expense versus a discretionary preference.
Exit Strategy: What happens if one owner wants to sell?
3. Sorting out the details ... and putting them in writing.
Like it or not, buying a house with your friends is a business transaction. Both parties need to protect their rights and their money.
Work with an attorney to formalize an ownership agreement that covers, at minimum:
·Legal Structure: Are you going to own the property as individuals or are you going to form an entity, such as a Limited Liability Company (LLC)?
Finances: Detail exactly how ownership is split. Consider establishing a joint bank account for all property-related income and expenses, as well as rules for using those funds. Also consider opening a reserve fund for emergencies.
Usage and Scheduling: Create a fair and clear system for allocating time at the property.
Decision-Making and Maintenance: Define how decisions will be made and outline the standards and schedule for cleaning and upkeep.
Exit Strategy: Specify what happens in the event of a buyout, death, divorce, or disability, and how one partner can voluntarily sell their share.
We’d be happy to offer a third-party perspective on buying a second home with friends. Let’s schedule a meeting and analyze how to incorporate this purchase into your Life-Centered Financial Plan.
