I just got back from my annual winter snowboarding vacation. As usual, even when I'm away from the office, I can not seem to stop thinking and talking about condo investing.
This year, I visited Sun Peaks Resort here in British Columbia with some good friends from California and Dubai. It was not long before talk of joining forces for a real estate venture became part of the post-slopes dinner conversation.
Most resort towns, of course, are already well known for "impersonal" fractional ownership plans – time shares, shared ownership in the form of 1/4 shares, rental pools, or other plans that involve sharing with people you do not know. That's a subject for another newsletter.
Today's newsletter is focused on buying a condo with friends and family. There are many pluses, but there are also some things to watch out for.
On the plus side …
I've got friends who not long ago purchased a condo lake cabin along with two other (related) families. They share it three ways, with 17 weeks each to use themselves or rent to others. So far they love it, and had I been in on the deal I would have been included in this year's three-family crab feast on New Years Eve.
Overall, the big draw to this idea is the low barrier to entry, the sharing of risks and rewards with people you know, and the "overlap" benefit for times like New Year's Eve.
Things to beware of …
The down side of doing business with people you like – and yes, investing in a condo is "doing business" – is that you do not want to jeopardize good relationships should something go wrong. And so 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.
It's likely, for example, that the owners will not use this second property all the time. This creates opportunities to rent out a portion or to exchange time with other owners. In the case of resort-managed properties, unused time is put into a rental pool with the profits divided amongst the owners.
So sit down together and set out a policy for how the time is accounted. Is each owner responsible for certain days / weeks and the associated costs of cleaning and renting of their portion? Or should you set a daily rental fee that everyone pays and at the end of the year divide any profits among the owners? (Personally, I prefer the latter approach – running the partnership as a business, thereby sharing any risks and rewards). There's no right answer here. But if you do not discuss the possibilities up front – and put them in writing – you're leaving the door open for confusion and hurt feelings.
Set up a contingency fund.
Nothing causes more partnership problems than trying to manage a real estate holding on a shoestring budget. Agree to set aside a fund of six to 12 months worth of expenses. This should give you ample funds to stay ahead of any maintenance surprises and general wear and tear that might occur.
It's also smart to have partnership or life insurance that protects the other owners should one of the partners pass away. This cost can be shared and terms set up in a legal agreement to protect the remaining partners from possible future estate issues.
Agree on an exit strategy.
The odds that all of you will want to stay in forever or sell at the same time are exceedingly low. So consider – and agree upon – what happens when cousin Dave needs cash to pay for his daughter's university expense. Do the other partners have right of first refusal? How will the selling price be determined?
In most cases, remaining partners either want to buy out the share or find someone they feel comfortable to take over. So there should be some terms in the partnership agreement that allow a reasonable time for the remaining partner (s) to arrange the funds or to find a suitable person to step in.
Keep in mind as well that you may also want to plan "trigger" events, such as sale of the property when its value reaches a certain level (this is an investment, after all). This too should be agreed upon before the purchase is completed. Overall, fractional ownership with people you know and love can be a terrific arrangement, from both an investment and recreational point of view. That said, and as with most things involving friends and family, a little planning and discussion at the outset goes a long way.
As for me, I'm on the hunt for this type of arrangement in the coming year – I do not want to miss any more New Year's Eve crab feasts!