Buying a Second Home with Family

You’d love to own a vacation home (who wouldn’t?!) but you’re not sure if you can afford it, or even qualify, on your own. Buying a vacation home with family can be the best of both worlds: you get the option—and prestige—of owning a second home, but you only have to pay a fraction of the costs.

Sounds like a dream come true, right? Buying a home with family can be, but that all depends. There are many factors to consider before you plunk down your hard-earned cash, sign those documents, and show up to your new vacation home…only to find your sister’s car in the driveway.

See where we’re going with this? Fortunately, you can keep your relationships intact if you take a proactive approach to buying a home with family.

That starts with answering a few questions.

How will you split the costs?

A joint mortgage can certainly lessen the burden of owning a second home. It can also make it easier for borrowers to qualify, or give them more buying power, which may translate into a larger house, better neighborhood, or more amenities.

That all sounds fabulous, but you’ve got to work out the details when buying a home with family. Will you split everything 50/50 between your nuclear family and your brother’s? If so, that doesn’t seem too complicated (though you still have to work out all the terms and conditions). What if, say, you’re going in on a home as a single guy with your sister’s family, your brother and his fiancée, and your elderly parents?

Whatever the scenario, you want to outline in writing—ideally with a real estate attorney—exactly what everyone’s financial obligations are. And this doesn’t just include the joint mortgage. You have to factor in repairs, insurance, and property taxes, in addition to who will be responsible for paying these bills and handling these workers.

How will you split your time at the house?

This is where you should never make assumptions. Your mom may have grand visions of her entire family splashing in the pool, sitting down to dinner, and roasting marshmallows over the fire pit at night. Your sister may believe this will be the perfect place for her family to escape the hustle and bustle of city life and reconnect. And you? You imagine throwing the most epic 4th of July parties your fellow frat brothers have ever seen.

That’s why you want to be clear up front about how this vacation property will be used. Determine if you’re buying a home with family as a place where you can all get together, or whether you collectively prefer a scenario where everyone has their own use of the space.

Don’t stop there, though. You also need to create a schedule that addresses who can use the property on what days and for how long. For example, if your cousin is covering 10% of the costs while you’re shouldering 40%, then it makes sense that she would have fewer days at the house. You should also address the subject of “outsiders.” Can you lend the home to friends or in-laws if you can’t use it during your given weeks?

The issue of holidays also needs to be tackled. Your default may be to spend Christmas together at Mom’s in Palm Springs, but now that you have a cabin in Tahoe, a quiet white Christmas sounds spectacular. Determine whether you will alternate holidays with the other buyers or if you all plan to occupy the home at certain times.

Do you plan to rent your second home out when no one is using it?

This is another area where you don’t want to make assumptions. First, you need to be sure you have the option to rent your home out to generate income in the short-term if you think that’s something you might be interested in. If so, you’ll possibly need to consider the tax implications of owning a rental property as well.

When you’re buying a home with family, you also need to ensure everyone is on the same page about the function of this home. You’ll not only need to agree on whether to rent it out, but for how much, on what days (or holidays), and how you’ll market it. Naturally, you’ll also want to assign a point person for a short-term rental. Many owners choose to hire a management company that can oversee the home’s operations when it’s being rented out, but that’s up to you.

As with the mortgage payment, bills, and repairs, you’ll need to determine how you plan to split any rental earnings or whether this money will sit in a reserve to address future renovations or emergency repairs.

What is your exit strategy?

It’s hard to think about selling a home you haven’t even purchased yet, but if you’re buying a home with family, it’s a good idea. Do you plan to keep the home while the grandkids are young, but sell it after they’re off to college? Do you see this as a five-year investment until you can afford a second home on your own? Does your dad assume this home will stay in the family for generations to come?

All things to consider. It pays to talk about these issues upfront, as even those with the best of intentions can sometimes find themselves on hard times. You need to know what your game plan is if someone wants out.

You’ll want to discuss:

• Whether you’re collectively willing to sell a family member’s share to an outsider (or non-family member)
• If the remaining investors get first rights of refusal to buy the other member’s share
• If the remaining investors have to approve a new investor (or outright buyer)
• How many investors must agree to sell the home if one investor voices that they’d like to sell

What happens if a family member passes on?

Death is not a fun subject, especially among family, but it is an important one when people’s livelihoods may be at stake. You want to determine up front how the title for the second home will be handled.

If each family member owns an equal share in the home, that member’s share gets split among the remaining owners in the event of their death. That’s called a joint tenancy with rights of survivorship (JTWROS). This keeps the home out of probate, and it prevents unintentional parties (say, a twenty-something niece or a long-term boyfriend) from becoming your investment partners.

A tenant-in-common (TIC) arrangement allows a family member to automatically pass their ownership stake onto their heirs, while an LLC can specifically outline who inherits a deceased family member’s share.

As you can see, there is a lot to think about before you pack your bikini and head to your new home on the Jersey Shore. So, get the ball rolling by having a few open and honest discussions about buying a home with family. After that, retain the services of a real estate attorney to document all terms and obligations in writing. This will help you preserve those familial bonds that led you to buying a home with family in the first place!

Ready to get started? The APM family is here for your family anytime! Give us a call today.

Santa Clarita mortgages lender American Family Funding can help you fulfill your dream of home ownership. A highly rated Santa Clarita mortgages lender, American Family Funding maintains a focus on community involvement and a commitment to giving back whenever possible. A friendly mortgage advisor will make the first time homebuyer experience an easy and stress-free experience — even with bad credit or a low down payment. The Santa Clarita home loan officers at American Family Funding also specialize in VA loans, reverse mortgages, refinancing and the STAR Loan Program.