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 investing in condos.
This year, I visited Sun Peaks Resort here in British Columbia with some good friends from California and Dubai. It wasn’t long before talking about joining forces for a real estate company became part of the post-slopes dinner conversation.
Most resort towns, of course, are already well known for their “impersonal” fractional ownership plans: timeshares, 1/4 share ownership, rental pools, or other plans that involve sharing with people who does not know. That is a topic for another newsletter.
Today’s newsletter focuses on buying a condo with friends and family. There are many advantages, but there are also a few things to keep in mind.
On the plus side …
I have friends who not long ago bought a cabin in a condo on the lake along with two other (related) families. They share it in three ways, with 17 weeks each to use themselves or rent to others. So far they love it, and if I had been in the deal, they would have included me in this year’s three-family crab feast on New Years Eve.
Overall, the big appeal of this idea is the low barrier to entry, the risk and reward sharing with people you know, and the “overlap” benefit at times like New Year’s Eve.
Things to keep in mind …
The downside to 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, I offer 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.
For example, owners may not use this second property all the time. This creates opportunities to rent a part or exchange time with other owners. In the case of resort-managed properties, the unused time is put into a rental pool and the proceeds are divided among the owners.
So sit down together and make a policy on how time is counted. Is each owner responsible for certain days / weeks and associated cleaning and rental costs of their portion? Or should you set a daily rental rate that everyone pays and at the end of the year divide the profits among the owners? (Personally, I prefer the latter approach: running 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 association problems than trying to manage real estate on a tight budget. Agree to set aside a spending fund for six to 12 months. This should give you enough funds to anticipate maintenance surprises and general wear and tear that may occur.
It is also smart to have a partnership or life insurance that protects the other owners in the event that one of the partners dies. This cost can be shared and the terms established in a legal agreement to protect the remaining partners from possible future patrimonial problems.
Agree on an exit strategy.
The odds that you all want 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 stock or find someone they feel comfortable taking over. Therefore, there should be some terms in the partnership agreement that allow a reasonable time for the remaining partners to organize the funds or find a suitable person to step in.
Also note that you may want to plan “trigger” events, such as the sale of the property when its value reaches a certain level (this is an investment after all). This also needs to be agreed before the purchase is completed. Overall, fractional ownership with people you know and love can be a great deal, both from an investment and a leisure standpoint. That said, and as with most things that involve friends and family, a little planning and discussion up front goes a long way.
As for me, I’m on the hunt for these kinds of arrangements next year. I don’t want to miss any more New Years Eve crab feasts!
