A House Divided
Buying a vacation home with a family member? First, consider these ground rules.
If you're looking into a vacation home, you may be tempted to ask your parents, siblings or adult children if they want to purchase it with you. After all, these are people you know, people you may want to spend vacation time with – and people with whom you can split all the costs. Before you sign anything, though, here are some things to consider:
Have a Detailed Plan
Spell out how basic housekeeping, expenses and upkeep will be shared. As members of the ownership group get older, keep in mind that their responsibilities might change over time, and anticipate these issues arising.
Make It Legal
Have a lawyer draw up a contract about how the ownership will be divided, what happens if someone exits the agreement, etc.
Put It in an Entity
You may want to own the property through an entity structure such as a limited liability company (LLC), family limited partnership (FLP) or a trust. These can provide a convenient way to deal with the property's finances, outline everyone's rights and responsibilities, and protect your other assets from liability in case of a lawsuit. And the entity structure makes it much easier to transfer partial ownership to another family member or other buyer.
Create a Separate Bank Account
The easiest way to keep track of the property's finances is to create a bank account dedicated to it. This can be titled jointly in the names of the property owners, or in the name of the entity that owns it if you choose to create one. The mortgage payment, property taxes, insurance, and any other recurring fees should all be paid from that account so it's easy to track expenses.
Know Who Plans to Use It
Some members of the family will inevitably want to use the vacation home more than others, or they may all want to use it at the same time over the summer or during holidays. Make sure this is addressed ahead of time so that it won't cause any hurt feelings. You should also consider what happens if a family member wants to make this a permanent home.
Have an Exit Strategy
Before you get into a joint ownership situation, know how you're going to get out. If one party wants to sell, does the other party have the right to buy their half? If so, how will the property be valued? It's not an easy conversation to have, but it's important to have that strategy in place before it becomes necessary. Again, going back to step one, it's important to identify any future obstacles and to plan accordingly. As always, your Baird Financial Advisor is available to assist in these discussions and offer their insight.
