As the summer season draws to a rapid close, many families are still chatting about teaming up to buy that vacation home for use season after season. While it may be financially tempting to buy something with partners that is nicer than what you may afford on your own, there are other issues to consider.
The first of which is the affordability by all of your desired owners. Frequently these co-ownership schemes involve siblings looking to have a meeting place for the family – one where the generations can grow together and maintain or enhance the family bonds as the group grows. But too often there is at least one of the desired owners who is really stretching on declaring their ability to participate. If that financial obligation ultimately becomes a burden for that or any other co-owner, you need a protocol that will resolve the situation.
You should know more about the financial side of your partners’ life. If a mortgage is needed to buy the property, a bank is likely to underwrite each individual partner on their individual ability to repay the entire loan. This may disqualify one or more of your desired partners. Furthermore, if one of the partners later wants to buy another primary residence, the loan on the vacation home may become an impediment to qualification for the new primary residence loan.
The form of ownership should not be in the individual names of the partner owners. This may make for many cumbersome issues such as settling the partner’s estate or defending a claim from another creditor of any partner. Some sort of LLC or trust typically makes sense for many. But it may be equally negligent to form an entity that does not address the material issues or moving parts. In a written agreement for your chosen entity, you should address issues such as the passing of a partner, the inability of a partner to come up with their share of the capital or carrying costs and a plan for regular maintenance and repairs. Consider setting up one of the partners as the partner in charge of the property and give them authority for a limited amount of spending for repairs and maintenance.
You’ll also need strict rules of use and a setting of the expectations. These rules will set out how you decide who will use the home when and what you are required to do in order to leave the home usable for the family coming in next.
If you anticipate wanting to preserve this home for future generations, you’ll need to start the financing plan for that now. This may involve life insurance or some sort of endowmentlike deposit to be sure that these next generations don’t run into future financial issues. Don’t take this financing lightly as the issue becomes even more important as the number of owners grows over the generations.
John P. Napolitano CFP, CPA is CEO of U. S. Wealth Management in Braintree, Mass. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.