How To Buy a Vacation Home With Friends

Buying a vacation getaway with friends or family makes ownership more affordable—but take these precautions first.

Friends and family by a tropical pool iStock

Do you dream of your very own beach house or a cabin in the woods?

Or maybe you’re more of a ski lodge type?

You might tell yourself to keep dreaming, as vacation homes can be so expensive. But there’s a more affordable way to obtain one: co-ownership. You could split the financial obligations and responsibilities with a trusted friend or family member.

The benefits are obvious: You get to share costs and responsibilities. Even better, co-ownership might enable you to purchase a home that’s a bit larger and has more luxury features, such as a hot tub, game room or outdoor kitchen. The arrangement may be especially appealing if you and your potential co-owners already vacation together or if you visit an area regularly.

But even with the best relationships, such a decision could lead to discord if not handled with care. Thomas P. Farley, also known as Mister Manners, specializes in etiquette and offers communication strategies for the workplace and between individuals. He recommends frank conversations about the partnership.

“To ensure those memories are primarily happy ones, it’s vital that any would-be purchasers have a thoughtful, candid and comprehensive conversation about the undertaking,” he says. “Each buyer must think, not just of the here and now, but also about each individual’s medium- and long-term vision for use of the home.”

The conversation shouldn’t feel awkward, he adds.

“This is a major investment, and no one should have seemed-like-a-good-idea-at-the-time regrets years later simply because the group failed to do its due diligence.”

When having those conversations, consider these additional legal and logistical considerations, including information from MarketWatch and as well as more thoughts from Farley.

Protect yourself.

First, know these two ownership types:

TIC: A property ownership between two or more non-married individuals can be established as a tenancy in common (TIC). Compared to establishing a limited liability company (LLC), a TIC involves less paperwork and costs less to set up, but there are risks. Under a TIC, if someone gets injured while they’re in your shared home, they could sue all co-owners individually for everything they’re worth. And, because you share ownership with others, you have less control over who’s in the home and what they do there.

LLC: There’s more protection for all owners under an LLC. For tax purposes, each owner is treated individually, but they are shielded from personal liability.

Before finalizing your agreement, decide whether the home is an investment that will be sold at a time everyone agrees on, or if it will be an asset to benefit future generations.

Death should also be taken into consideration. Under a TIC, when a co-owner dies, their heirs automatically gain ownership. An LLC, however, specifically states who inherits a co-owner’s share of the home.

Work out who’s responsible for what.

Financial: LLCs require an operating agreement. It’s recommended that a lawyer draft that agreement to establish each owner’s interest. The ownership ratio that’s agreed upon will determine how costs such as insurance and real estate taxes are divvied up. Farley also adds this consideration: For those contributing a smaller portion of the purchase price, does it mean they have less say regarding use of the house or in decision-making?

Maintenance: The operating agreement also establishes maintenance and capital improvement guidelines. It’s kind of like a real estate prenuptial agreement.

In case of emergencies: Establish a reserve fund for unforeseen expenses and repairs. Farley says if one partner is particularly handy and can manage a repair without soliciting a tradesperson, they can earn a credit toward other expenses to compensate for their time and expertise.

Decide how to share.

Usage: Discuss a usage schedule beforehand. If co-owners wish to visit solo or with just their immediate families, determine when that will be. Setting a schedule for the year to establish weekend and holiday visits can ensure that all owners get equal opportunities to use the home at their most desired times. Farley recommends revisiting the schedule annually and advises that everyone should come prepared to compromise.

He also raises these possible scenarios: Can someone who isn’t an owner use the house without an owner present? Or can dependents use the home if an owner isn’t there?

Renting: Determine upfront whether all owners wish to use the home to generate income through short-term rentals when they’re not using it themselves. (Keep in mind that some communities don’t allow short-term rentals.) You and your co-owners must also agree upon any other responsibilities related to running a short-term rental.

Determine how to manage conflicts.

Farley recommends including an agreement in the contract stipulating professional mediation in case the partners should find themselves in a major conflict that’s difficult to resolve.

“Ideally, buying this home together turns out to be the best decision the members of the group ever made,” Farley says. “However, to ensure it doesn’t turn out to be a relationship-ending nightmare, the more fully the group can anticipate potential issues and equitable outcomes in advance, the more enjoyable and fruitful this partnership will be.”

So plan thoroughly, try to anticipate a variety of possible scenarios and communicate honestly before undertaking co-ownership. Once you establish the business side of things, you’re on your way to owning the vacation home of your dreams.

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