How Friends Can Buy a Vacation Home Together for the Long Haul
Set it up correctly from the start, and you can share a dream getaway with friends all the way into retirement — without risking your nest egg or friendship.
Owning a vacation home means you'll have a place of your own to retreat to whenever you feel the calling. You won't have to worry about local hotels booking up or getting stuck in a dodgy rental that makes your skin crawl. It's a popular move for setting up the lifestyle and community you want in retirement.
If you don't want to bear the financial burden of buying and maintaining a vacation home on your own, you could opt to buy one with friends. For example, if there's a couple you and your spouse know who tend to vacation in the same spots you prefer, you could choose your ideal destination, buy a home together, and share in the benefits and costs.
In theory, it's a good idea. But it may be more complex and risky than you'd expect.
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The right structure is key
At face value, co-owning a vacation home might seem smart. In practice, it's important to have the proper setup, says Raul Gastesi, partner and co-founder of Gastesi Lopez Mestre & Cobiella PLLC.
Set up an LLC
"Two couples buying a vacation home together should not take title in four individual names," Gastesi insists. "They should form a limited liability company, have the LLC purchase and hold the property, and have the couples own membership interests in the company."
The reason, Gastesi says, boils down to liability.
"A vacation home means guests, a pool or a dock, someone else's grandchildren, and, if the couples ever rent it out when they are not using it, a stream of strangers," he explains. "If someone is injured on that property, a claim against jointly held real estate is a claim against all four owners personally, which puts retirement accounts and primary residences into the conversation."
On the other hand, Gastesi says, if the LLC owns the property, any claims that arise are made against the company and its insurance.
"That protection matters most in the short-term rental scenario, which is where a lot of these arrangements end up once the couples realize the house sits empty 10 months a year," Gastesi says.
Gastesi also cautions that an LLC is not a substitute for good insurance.
"The policy needs to be written in the company's name for the right kind of use, but it is the layer that keeps a bad accident from reaching everyone's personal balance sheet," he explains.
Think through financing hurdles
Of course, one pitfall is that if you'll be financing the property, Gastesi warns that a mortgage may be hard to come by.
"Many residential lenders will not write a conventional mortgage to an LLC," he explains. "Some buyers close individually and transfer the property into the company afterward, but that transfer can trigger the mortgage's due-on-sale clause."
Gastesi also points out that a vacation home does not qualify for the capital gains exclusion available on a primary residence.
Know how co-ownership impacts estate planning
Co-owning a home with friends means you'll need to document everything carefully to ensure all parties pay their share and reap equitable benefits. That may seem easy enough to arrange. But what happens if an owner passes away?
According to Gastesi, this is where the LLC earns its keep a second time.
"When the company owns the real estate, each couple owns a membership interest, which is personal property rather than real estate," he explains. "That interest passes under their estate plan. It does not pass automatically to the surviving couple."
What this means, though, is that in the absence of careful planning, that interest may also land with heirs who may not want a vacation home, may not be able to afford their share of it, and may have no relationship with the other couple.
"That is how a friendly arrangement turns into a dispute between people who never agreed to be in business together," Gastesi says. The fix, he says, belongs in the operating agreement, not each couple's will.
"[That agreement] should contain buy-sell provisions triggered by death, divorce, incapacity, bankruptcy, or failure to pay, a right of first refusal in favor of the other couple, an agreed method for setting the price such as an independent appraisal, and payment terms spread over time," he says.
Another reason to go the LLC route?
"If the vacation home sits in a state where neither couple lives, real estate held directly requires a probate proceeding in that second state when an owner dies," Gastesi explains. "A membership interest in an LLC is personal property, which generally avoids that ancillary administration. For a Florida couple with a mountain house in North Carolina, or the reverse, that alone can justify the structure."
Keeping the friendship intact
The right structure and operating agreement can protect you and the couple you're looking to buy a home with financially if one of you passes away. But to preserve the friendship, Kevin Tamlyn, founder of Next Stage Financial, says it's important to set clear ground rules
"Relying on 'we'll just figure it out as we go' is a recipe for a ruined friendship," Tamlyn says. "Sit down together and get crystal clear on the money, day-to-day living, and an exit strategy."
Tamlyn also suggests pooling money into a shared checking account that covers three to six months of expenses like HOA fees, property taxes, insurance, utilities, and routine maintenance. Then pay all running costs from that account.
Tamlyn says it's also important to agree on how to split peak dates.
"A simple rotation, like flipping prime summer weeks or alternating Thanksgiving and Christmas each year, prevents quiet resentment," he insists.
Additionally, establish a clear policy on guests and pets. Also, spell out what happens if one couple wants or needs out.
"Life changes," Tamlyn says. "Someone might need cash for medical expenses, want to move closer to grandkids, or simply stop using the home. Agree on how you’ll value the home when someone wants to leave."
Gastesi agrees and says a strong operating agreement could be the ticket to keeping the friendship intact.
"Its job is to absorb the disagreements so the friendship does not have to," he explains.
Finally, Gastesi says, each couple should have their own attorney review the operating agreement to ensure that they're comfortable with its contents.
"It costs a little more at the start," he says. However, "it's the clearest signal that both sides understood what they signed, which is exactly what you want on the record if the arrangement is ever tested."
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