How to Ruin Real Estate Investment Before You Begin
Dear Rich Lifer,
Over the weekend, I shared some of the pros and cons of buying a vacation home.
Not only do you need to be able to cover the upfront costs of buying a second home, you also have ongoing yearly expenses to cover as well.
And unless you intend on renting out the property for a good chunk of the year, forget about seeing a significant return on your investment.
But, a few readers asked if buying a second home with friends is a better idea.
Today I’ll dissect this question a bit.
Should You Buy a Vacation Home with Friends?
Buying beachfront property or a cabin in the mountains might seem like a pipe dream on your own dollar. That’s why more and more buyers these days are teaming up with friends to share the cost.
Dividing the mortgage sounds great on paper, but buying a second home with friends comes with its own set of challenges.
Take the obvious, if things go sideways, you could risk losing a close friendship. There’s also legal battles over the property and all sorts of headaches that can arise.
So before you even start talking to a friend or friends about going halfsies on a second home, understand what you’ll be giving up and what you have to gain by not being the sole owner.
Half the Say on Everything
Splitting the cost on a vacation property sounds tempting, but when you team up you have to be willing to compromise. You might have been best friends all your life but share completely different tastes in home decor.
The same goes for location, cleanliness, etc. If you’re seriously considering buying a property with a friend or another party is involved, set the stage for these types of discussions early on. You want to agree on what you’re both looking for in a property before you get too far along.
It’s easy to assume everyone is on the same page. Don’t assume anything. Ask the obvious questions on your mind.
For example, will everyone want to use the property year-round or will it generate income as a rental for part of the year? Sort through these questions before you sign on the dotted line so you avoid any fights post purchase.
How Will You Handle Exits?
A lot of joint buyers will purchase property with the intent of holding onto it forever, or at least long enough to pass down to their kids.
Before you buy with friends, decide what happens if someone wants out. You should already have an exit strategy so there are no surprises when the time inevitably comes.
Even having upfront discussions about how long each owner sees themselves staying invested in the property is important. Because if someone wants to sell after a few years and the other party doesn’t, there could be a conflict that leads to legal drama.
Also, determine whether you’d be able to afford to buy out your friend, or cover the extra costs in the event you need to find another partner. Thinking through these questions and having written down plans for different scenarios will go a long way in mitigating any future dilemmas.
Who Will Take Care of the Maintenance?
If you’re not organized or you don’t like planning, you better hope your friend or another person in your party does. Because owning property as a group requires a lot of planning and organization.
You need to know who gets access to the property and when, who will do the upkeep and maintenance, who is going to pay the monthly expenses, etc. If you don’t have someone in your group that can stay on top of all this scheduling, you might be in for some headaches.
You Can’t Control Your Friends’ Finances
Probably the biggest risk of buying a house with a friend or multiple people is how their finances can negatively impact yours. Even though you did your due diligence, you can’t control your friends’ financial situation. If they fall behind on their share of payments, your credit could be affected.
Also, you run the risk of not being able to qualify for other loans when you carry a large mortgage. Lending institutions will look at the amount of debt you’re responsible to pay monthly relative to your income. Because you’re responsible for the entire mortgage payment (your friend is also), your debt-to-income ratio may increase such that you can’t qualify for an auto loan or personal loan should you want one.
The Bottom Line
Buying a vacation home with friends is a great way to lessen the financial burden of owning a small piece of paradise. However, it comes with its own set of unique challenges.
If you can have these early talks and figure out a solid strategy that works for all parties involved — also finding a really good real estate attorney helps — you can make this work.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap