3 Things to Consider Before Sharing Condo Ownership With Friends and Family
I just got back from my annual winter snowboarding vacation. As usual, even when I’m out of the office, I can’t seem to stop thinking and talking about condo investing.
This year I visited Sun Peaks Resort here in British Columbia with some good friends from California and Dubai. It wasn’t long before talk of joining forces for a real estate company became part of the post-clutch dinner conversation.
Most resort towns, of course, are already well known for “impersonal” fractional ownership plans: timeshares, 1/4 share ownership, rental pools, or other plans that involve sharing with people who you don’t know That is a topic for another newsletter.
Today’s newsletter focuses on buying a condo with friends and family. There are many more, but there are also a few things to keep in mind.
On the positive side…
I have friends who recently bought a cabin in a lakeside condo along with two other (related) families. They share it three ways, with 17 weeks each to use or rent to others. They love it so far, and if I’d been in on the deal, they would have included me in this year’s Three Family Crab Feast on New Year’s Eve.
Overall, the big draw to this idea is the low barrier to entry, sharing risks and rewards with people you know, and the “overlap” benefit for times like New Year’s Eve.
Things to keep in mind…
The downside of doing business with people you like, and yes, investing in a condo is “doing business,” is that you don’t want to jeopardize good relationships if something goes wrong. And with that in mind, here are three suggestions for making a profitable (and fun) real estate investment without losing friends and family along the way:
Establish a clear set of written rules.
It is likely, for example, that the owners do not use this second property all the time. This creates opportunities to rent a part or to exchange time with other owners. In the case of resort-managed properties, unused time is put into a rental pool and the profits are divided among the owners.
So sit down together and come up with a policy for how time is counted. Is each owner responsible for certain days/weeks and associated cleaning and rental costs for their portion? Or should I set a daily rental rate that everyone pays and at the end of the year split the profits between the owners? (Personally, I prefer the latter approach: run the partnership like a business, thus sharing the risks and rewards.) There is no correct answer here. But if you don’t discuss the possibilities up front, and put them in writing, you’re leaving the door open for confusion and hurt feelings.
Establish a contingency fund.
Nothing causes more partnership problems than trying to manage real estate on a shoestring budget. Agree to set aside a fund of six to 12 months of expenses. This should give you enough funds to anticipate any maintenance surprises and general wear and tear that may occur.
It’s also smart to have a partnership or life insurance that protects the other owners in case one of the partners dies. This cost can be shared and the terms can be established in a legal agreement to protect the remaining partners from possible future wealth problems.
Agree on an exit strategy.
The odds of all of you wanting to stay forever or sell at the same time are extremely low. So consider, and agree, what happens when Cousin Dave needs cash to pay for his daughter’s college expenses. Do the other partners have the right of first refusal? How will the sale price be determined?
In most cases, the remaining partners want to buy the part or find someone they feel comfortable with to take over. Therefore, there must be some terms in the partnership agreement that allow reasonable time for the remaining partners to organize the funds or find a suitable person to intervene.
Note also that you may also want to plan for “trigger” events, such as the sale of the property when its value reaches a certain level (it is an investment, after all). This must also be agreed before the purchase is completed. In general, fractional ownership with people you know and love can be a great arrangement, both from an investment and recreational standpoint. That said, and as with most things involving friends and family, a little planning and discussion early on goes a long way.
As for me, I am on the hunt for this kind of arrangement for next year. I don’t want to miss any more New Year’s Eve crab feasts!