vacation home, two families paying for it, need help with ownership structure

[thisisjeopardy]

We have a crumbling cottage that my in-laws own. They own the land 100% outright. We've engaged a builder for a raze and rebuild. We are almost at the demolition process.

My wife and I will be paying half the construction loan and have paid some of the pre-construction costs. Everything is tracked on a spreadsheet.

As this is a vacation home, we will be renting it out when we aren't there. We are forming an LLC and the real estate attorney just needs to have us give them the ownership share across both households. This is a highly popular tourist area and the expectation from the builder and a management company we've talked to (and locals) is that renting this out likely would pay for the construction loan and then some.

Let's say the land is worth $400k, and I've paid $5k pre-construction costs, and the in-laws have paid $20k so far. They have another $100k earmarked for the project, likely to be put down pre-loan so we borrow less (the lender did say the land itself was good enough for collateral but the extra $100k is less borrowed, less P&I).

Could anyone please advise a formula to help calculate ownership percentage of the property/LLC?

If I had to guess, the loan would be about $800k. We won't know exactly until the plans are finalized (soon). Moving forward all capital/operating expenses, pre-construction invoices and construction loan payments will be split 50/50 (minus that eventual $100k or so down payment).

I feel like there is a formula that shouldn't be too crazy to work out but my brain isn't just getting there quite yet.

thanks!

[srad]

The way I'd structure it, is based on who brings how much into the deal.  That's assuming the work spent on the place is split evenly.  I'd adjust the percentage if your inlaws plan do nothing and you manage everything. 

I read your post as i understand it this is the breakdown for who is bringing what to the table

Inlaws:
Land  400k
Cash  120k
Loan  400k
Total: 920k

You
Cash  5k
loan  400k
Total: 405k

Total for deal: 1.325mm
Split 70/30  Inlaws get 70 you 30.

If you are managing the property 100% then you could move the split between 60/40 and 50/50.  You really need to find out what the land is worth, that's the biggest unknown here.  if its less, you get more of the deal and vice versa. 

[dandarc]

I mean, the in-laws are bringing $520K between the land and actual cash and you're bringing $5,000 + a signature on a loan. Apparently the place should cash-flow as a business. Why do they need you at all? Do they not have the credit to do this without you?

Seems likely to me this is them trying to share some wealth with you. In that scenario, the percentage is whatever you negotiate. Also keep in mind you'd likely be on the hook for the whole loan in the event of default. What happens when somoene dies? Divorce? You should probably know these details before you negotiate what a reasonable split is.

Actually even more important to get into the nitty-gritty details when doing business with family. Temptation is always going to be to trust them (I mean if you're even considering doing this, you probably do trust them) but with family there's a lot more to lose if that trust is broken.

[tooqk4u22]

The way I'd structure it, is based on who brings how much into the deal.  That's assuming the work spent on the place is split evenly.  I'd adjust the percentage if your inlaws plan do nothing and you manage everything. 

I read your post as i understand it this is the breakdown for who is bringing what to the table

Inlaws:
Land  400k
Cash  120k
Loan  400k
Total: 920k

You
Cash  5k
loan  400k
Total: 405k

Total for deal: 1.325mm
Split 70/30  Inlaws get 70 you 30.

If you are managing the property 100% then you could move the split between 60/40 and 50/50.  You really need to find out what the land is worth, that's the biggest unknown here.  if its less, you get more of the deal and vice versa.

Nope.  You need an equity contribution agreement that addresses the initial and ongoing until it cash flows.   Debt is not equity.   

As @dandarc pointed out, inlaws are bringing $520k of equity vs.  your $5k, so your inlaws should own 99% of the deal.  Typically in a transaction like this where the parties would be 50/50, you would determine the equity required loan amount. 

So based on your info, Total budget is $1,325,000. So if you wanted a 50/50 split then it should look like this.

Budget.................................$1,325
Est. Loan..................................800
Req. Equity...............................525

Inlaw land................................400
Inlaw equity req.......................262.5
Cash out to inlaw.....................137.5

Equity req from you (cash)......262.5

Obviously, if you think you are getting half of a $1.5mil house for $5k I know you won't show this to your inlaws.  That said, if this is just a way to transfer the property to you guys without estate taxes and whatnot then it doesn't matter.

As for the additional contributions (50/50 split going forward) that can be factored in but won't move the dial all that much, and if someone doesn't pay there should be a cram down provision.

Above was the basic 50/50 scenario, but if it was treated more Ike a private equity transaction where you are doing all the work and pro idong the guarantees for the loan and their equity is passive with no further obligation you could structure a waterfall or earn-out where you get an outsized return or share once property performs or refinanced but after they get paid pack (typically would include an accrued preferred return).

I really hope this is estate planning more than anything else and your inlaws are really well off,  bc otherwise you are really taking advantage of your inlaws

[srad]

The way I'd structure it, is based on who brings how much into the deal.  That's assuming the work spent on the place is split evenly.  I'd adjust the percentage if your inlaws plan do nothing and you manage everything. 

I read your post as i understand it this is the breakdown for who is bringing what to the table

Inlaws:
Land  400k
Cash  120k
Loan  400k
Total: 920k

You
Cash  5k
loan  400k
Total: 405k

Total for deal: 1.325mm
Split 70/30  Inlaws get 70 you 30.

If you are managing the property 100% then you could move the split between 60/40 and 50/50.  You really need to find out what the land is worth, that's the biggest unknown here.  if its less, you get more of the deal and vice versa.

Nope.  You need an equity contribution agreement that addresses the initial and ongoing until it cash flows.   Debt is not equity.   

As @dandarc pointed out, inlaws are bringing $520k of equity vs.  your $5k, so your inlaws should own 99% of the deal.  Typically in a transaction like this where the parties would be 50/50, you would determine the equity required loan amount. 

So based on your info, Total budget is $1,325,000. So if you wanted a 50/50 split then it should look like this.

Budget.................................$1,325
Est. Loan..................................800
Req. Equity...............................525

Inlaw land................................400
Inlaw equity req.......................262.5
Cash out to inlaw.....................137.5

Equity req from you (cash)......262.5

Obviously, if you think you are getting half of a $1.5mil house for $5k I know you won't show this to your inlaws.  That said, if this is just a way to transfer the property to you guys without estate taxes and whatnot then it doesn't matter.

As for the additional contributions (50/50 split going forward) that can be factored in but won't move the dial all that much, and if someone doesn't pay there should be a cram down provision.

Above was the basic 50/50 scenario, but if it was treated more Ike a private equity transaction where you are doing all the work and pro idong the guarantees for the loan and their equity is passive with no further obligation you could structure a waterfall or earn-out where you get an outsized return or share once property performs or refinanced but after they get paid pack (typically would include an accrued preferred return).

I really hope this is estate planning more than anything else and your inlaws are really well off,  bc otherwise you are really taking advantage of your inlaws

Ok, I can be guilty of assuming things way to much...  When I looked at this question, i just assumed the inlaws were helping them out. Bids are already getting done on the construction of the house, an LLC is being formed, so this deal is happening.  Why would they even allow OP in this deal for 5k in the first place if not to be a family thing.  So I used the debt as part of the equation. 


 

[tooqk4u22]

Ok, I can be guilty of assuming things way to much...  When I looked at this question, i just assumed the inlaws were helping them out. Bids are already getting done on the construction of the house, an LLC is being formed, so this deal is happening.  Why would they even allow OP in this deal for 5k in the first place if not to be a family thing.  So I used the debt as part of the equation.

Except for this question the OP made, if it was sustainable helping out or eventually wod be OP's anyway then ownership split would be less relevant.   

Could anyone please advise a formula to help calculate ownership percentage of the property/LLC?

[thisisjeopardy]

I mean, the in-laws are bringing $520K between the land and actual cash and you're bringing $5,000 + a signature on a loan. Apparently the place should cash-flow as a business. Why do they need you at all? Do they not have the credit to do this without you?

Seems likely to me this is them trying to share some wealth with you. In that scenario, the percentage is whatever you negotiate. Also keep in mind you'd likely be on the hook for the whole loan in the event of default. What happens when somoene dies? Divorce? You should probably know these details before you negotiate what a reasonable split is.

Actually even more important to get into the nitty-gritty details when doing business with family. Temptation is always going to be to trust them (I mean if you're even considering doing this, you probably do trust them) but with family there's a lot more to lose if that trust is broken.

I will be paying 50% of the following henceforth:  construction loan (converts to a mortgage), remainder of the pre-construction costs, moving/storage expenses from existing cottage that will be razed, furnishings (including ktichenwares, linens, supplies, etc etc etc), operating expenses, utilities, everything really.

They are retired and they don't want to deal with it and have put this off for years. The existing place is literally falling apart and its beyond the point of repair. They have paid most of the pre-construction costs to front-load from their earmarked down payment then the old man decided to renegotiate the agreement and backload and have us start paying now, which is totally fine!

I've dealt with real estate attorney, storage, moving, the builder (which entails a ton of meetings), town zoning boards, etc, etc. I can see why they put it off!

So really yeah I think it's just a matter of totaling up what each side has put in/agree to put in and splitting it that way. Just need to come to an agreement on what the land is worth.

[dandarc]

So y'all are going to be doing the work, have put a small amount of money in, but the brother gets a share at inheritance time. That makes it harder to know what is fair - if the inheritance just happened when the in laws died, you can sell it and split it. But you'll be putting in a bunch of work for an unknown timeframe.

I think maybe you should withdraw your investment (seriously - they do not need you at all to do this) just manage the place and be paid fairly to do that, then split the ownership 50/50 when it is inherited. Seems like buying in for a really minimal investment is kind of pointless in the arrangement and just makes things more complicated than they need to be.

If you went by what you're bringing to the table up front - 99% your parents own, 1% you own. You do the management and wind up with 50.5% and the brother gets 49.5%. That doesn't seem fair given you did the work and the longer the in laws live, the worse a deal this gets to be for you. If you did something like 70/30 and the parents die relatively soon, then the brother gets a bit of a raw deal getting just 35% - you didn't do the work to have earned that larger share.

If you just say "you know, just hire us to manage it at a reasonable price and we'll split it 50/50 with brother whenever that time comes", then on the face of it it is a pretty fair deal. Your reward for managing the property along the way is whatever you are paid for doing that work, and everything splits in a way that is hard to argue with when inheritance time comes.

Whatever you do be sure it is all written down clearly and brother is deeply involved in the conversation. This kind of real-estate deal fairly frequently appears in the "Inheritance Drama" thread here.

[thisisjeopardy]

The way I'd structure it, is based on who brings how much into the deal.  That's assuming the work spent on the place is split evenly.  I'd adjust the percentage if your inlaws plan do nothing and you manage everything. 

I read your post as i understand it this is the breakdown for who is bringing what to the table

Inlaws:
Land  400k
Cash  120k
Loan  400k
Total: 920k

You
Cash  5k
loan  400k
Total: 405k

Total for deal: 1.325mm
Split 70/30  Inlaws get 70 you 30.

If you are managing the property 100% then you could move the split between 60/40 and 50/50.  You really need to find out what the land is worth, that's the biggest unknown here.  if its less, you get more of the deal and vice versa.

Nope.  You need an equity contribution agreement that addresses the initial and ongoing until it cash flows.   Debt is not equity.   

As @dandarc pointed out, inlaws are bringing $520k of equity vs.  your $5k, so your inlaws should own 99% of the deal.  Typically in a transaction like this where the parties would be 50/50, you would determine the equity required loan amount. 

So based on your info, Total budget is $1,325,000. So if you wanted a 50/50 split then it should look like this.

Budget.................................$1,325
Est. Loan..................................800
Req. Equity...............................525

Inlaw land................................400
Inlaw equity req.......................262.5
Cash out to inlaw.....................137.5

Equity req from you (cash)......262.5

Obviously, if you think you are getting half of a $1.5mil house for $5k I know you won't show this to your inlaws.  That said, if this is just a way to transfer the property to you guys without estate taxes and whatnot then it doesn't matter.

As for the additional contributions (50/50 split going forward) that can be factored in but won't move the dial all that much, and if someone doesn't pay there should be a cram down provision.

Above was the basic 50/50 scenario, but if it was treated more Ike a private equity transaction where you are doing all the work and pro idong the guarantees for the loan and their equity is passive with no further obligation you could structure a waterfall or earn-out where you get an outsized return or share once property performs or refinanced but after they get paid pack (typically would include an accrued preferred return).

I really hope this is estate planning more than anything else and your inlaws are really well off,  bc otherwise you are really taking advantage of your inlaws

In the end it doesn't matter really, they will leave 50% of their ownership to both kids (one being my wife). All of us are well off.

So moving forward 50% of everything will be paid by both households. The bank provides a construction loan that you must pay interest only during construction then it converts to a mortgage (only one closing). Both households will pay 50% down the middle for all utilities, mortgage, the inital furnishings etc.

So I guess I'm confused on how this changes over time with us having paid exactly half of the loan. Does this change anything?

[thisisjeopardy]

A couple more points here:

This will be an LLC. We are going to rent this out this out because we're only there a few times during the year. A management company will handle most the work after it's up. Real Estate attorney will draw up the operating agreement or whatever, all family members will be agree. They just need us to give them the initial ownership split. It is my expectation that a lot if not all of the loan will be paid off by short term renters (you can get well over $1k/night during the tourist season here) but regardless we have the means to pay for this with zero income off it.

It is my intention that in-laws talk to their financial advisor to make sure any agreed upon split makes sense and is fair. They can discuss about estate planning purposes as well.

[dandarc]

0% - that's your share. Keep your $5,000 and maintain some semblance of family harmony. FFS you're not even going to do much work on this - therefore "you get nothing" is the fair way.

If it was just your household inheriting then whatever - all winds up the same in the end just with varying degree and timing with paperwork. But you're just asking to be in court with your brother in law when his parents die by trying to weasel into this deal for basically nothing. If you're in the US, there's also implications with a large gift that could be a major problem for you and your in-laws depending on how their end-of-life winds up going. If you put in $5,000 and immediately get 30% of this house, then your in-laws gave you hundreds of thousands of dollars in one shot.

The place is supposed to cash-flow according to the experts. That means you won't actually need to make those loan payments if it is true. If you insist on proceeding and buying in, then you get at most 1% on day 1, and to the extent you actually put more money into the business, that's how you increase your share over time. But the business should not need your money once up and running because supposedly it cash-flows - you wrote as much. Basing ownership on money invested actually should make this fairer for all involved, including the brother who stands to lose a significant amount of money over this.

[thisisjeopardy]

0% - that's your share. Keep your $5,000 and maintain some semblance of family harmony. FFS you're not even going to do much work on this - therefore "you get nothing" is the fair way.

If it was just your household inheriting then whatever - all winds up the same in the end just with varying degree and timing with paperwork. But you're just asking to be in court with your brother in law when his parents die by trying to weasel into this deal for basically nothing. If you're in the US, there's also implications with a large gift that could be a major problem for you and your in-laws depending on how their end-of-life winds up going. If you put in $5,000 and immediately get 30% of this house, then your in-laws gave you hundreds of thousands of dollars in one shot.

The place is supposed to cash-flow according to the experts. That means you won't actually need to make those loan payments if it is true. If you insist on proceeding and buying in, then you get at most 1% on day 1, and to the extent you actually put more money into the business, that's how you increase your share over time. But the business should not need your money once up and running because supposedly it cash-flows - you wrote as much. Basing ownership on money invested actually should make this fairer for all involved, including the brother who stands to lose a significant amount of money over this.

It comes down to this:

This crumbling cottage never gets rebuilt without me taking on half the loan. They will be selling their house and moving into assisted living in a few short years. They just aren't going to take on what is probably going to be yet another $6k-$7k monthly payment. They aren't super wealthy, but well enough off to easily afford half.

Without any of this the cottage eventually becomes unlivable in the next couple years and we raze it and likely just sell the land or sit on it.

We love the area. We go there a couple times a year for days or weeks at a time. The most detrimental thing that could happen to my wife or BIL outside of injury/death/illness/accident would be to learn that summertime in Cape Cod is no more.

In the end I could care less that I've paid X years and Y months down the middle of the loan and operating expenses only to end up 50.5% to 49.5% with brother in law. At least I would have the overriding vote if he wanted to do something.

I will have my FIL discuss the particulars with his financial advisor who can advise the estate planning is within legal parameters, etc.

[PMJL34]

OP,

What's in this for you? Please answer honestly.

[thisisjeopardy]

OP,

What's in this for you? Please answer honestly.

I felt I was forthcoming in my last post above:

The land / house has been in the family for decades (Wife's family). They have specific memories there and we all want this to be a generational home with 3 households. The cottage is extremely small (700 sq ft single story) and can't accommodate all of us at once. They don't want to see the property go and they want to enjoy it.

It has bugs/mice, completely beyond the point of sinking money into repair or upgrading (baseboard heater, no forced air, tiny walk in kitchen, can't use the toaster and the percolator at the same time).

It's beyond its lifecycle at this point.

The in-laws have put off razing/rebuilding for years due to the volume of work involved engaging with a builder, the town, and yes money. They are fiscally conservative but after talking about it over the years I said I could help pay for half the loan and operating/other capital costs involved so we have a nice climate-controlled two story, 3BR 2.5BA house without any pests, onside W/D, just a nice comfortable place to enjoy the area and we could subsidize most if not all of this from having a management company rent this out and turn it over for us for half the summer (and all the off-season) when we're not there.

It's just that simple.

They don't want to take on a construction loan (converts to a mortgage when built) at this stage of their life entirely on their own.

In order to have short-term rentals subsidize or pay the added debt, we'd need an LLC to protect us from liability. In order to do that - SOMETHING has to be set in a legal document as to what ownership allocation is. It also will have provisions to protect someone from forcing a sale or selling off to someone else anyone else doesn't agree with.

I'll just have it set to 99/1 and be done with it. I don't really care. I have a real estate attorney waiting to finish the documents. In-laws have specifically stated they want to leave behind everything 50/50 to both children, everyone thinks that is fair (in what world would it not be?).

The town approved the plans, the demolition permit is pending normal approval, in 2 months it will be knocked down and we should have funding (everyone on the loan has 800+ FICO, plenty of cash/investments (Even in this market), was already told the land alone is enough collateral).

We just want a nice cozy place and it aint happening if I don't buy in.

My household income is roughly $450k, BIL has close to that but he bought a huge house and is remodeling it extensively, he can get in later if he can. FIL/MIL are retired doctors and their financial advisors said they could afford assisted living and half the added debt if there was no rental subsidies.

My wife, myself, BIL and his wife would love to grow old here (late 30s to mid 40s) - we each have 2 kids. We want a place to hang our hat and play with our children, eventual grandchildren. That is what it's in for me.

[Metalcat]

Oof...I just...wouldn't do this.

I get the goal, but Holy crap you are making the situation incredibly complicated for yourself if *anything* doesn't go according to plan.

I would look for the very simplest way of doing this.

If it's just going to be inherited and split, could you take over the property now with the sibling who is set to inherit? Split the land down the middle and each take on half the loan?

Ugh, even that's complicated as fuck.

Oy. I truly understand *why* you are going to do this. But daaaaaamn, you are setting massive landmines for yourself with almost any way you set it up.

I was in a very similar negotiation with my parents in 2020, and based on the people involved, my spouse and I firmly stated that the only way it could work for us was if we bought the land and the house. The siblings would inherit cash instead of shared ownership or needing to be bought out when they died.

Everyone involved got extremely pissy about that stance and that was all we needed to see to know that we were making the right call.

I don't know what the right answer is for you. They're all high risk.

[PMJL34]

OP,

Thanks for your response. I think you've clearly communicated the situation and financing, etc. We also know everyone can afford it, but that's not what I'm asking.

My question is specifically: What are you hoping to get out of this? What's the best case scenario and what's your goal?

You semi-answered the question, but for everyone on the outside it makes no sense. That is why everyone is telling you that we wouldn't personally do it given the information provided.

Why put all this time/effort/stress/money (plus a 30 year mortgage) into something that will be split 50/50 with someone who won't invest a penny or anytime into this matter (plus it sounds like they will get to use it as much as your family will).

Is this you hoping to make some profit from this property/grow your wealth? Is your wife sentimental and wants to see this happen and you are supporting her? Are you just being very generous and helping someone (in-laws) because you can? Are you secretly hoping that your family will be able to keep 100% of this property in the future? Or is money burning a hole in your pocket?

This forum thinks there's a better way to achieve any of the above reasons without this deal. I'm only asking because it's really hard to justify your actions given the circumstances unless we know what your ultimate goal is. You will have resentment if the brother in law or the parents in law continue to use it the weeks your family wants to, or if the brother in law ends up inheriting 50% after not lifting a finger or a cent while you theoretically put 30+ years worth of time/effort/money into this property.

I'm not saying don't do it at all...but don't do it as it stands.

Best of luck!

[thisisjeopardy]

OP,

Thanks for your response. I think you've clearly communicated the situation and financing, etc. We also know everyone can afford it, but that's not what I'm asking.

My question is specifically: What are you hoping to get out of this? What's the best case scenario and what's your goal?

You semi-answered the question, but for everyone on the outside it makes no sense. That is why everyone is telling you that we wouldn't personally do it given the information provided.

Why put all this time/effort/stress/money (plus a 30 year mortgage) into something that will be split 50/50 with someone who won't invest a penny or anytime into this matter (plus it sounds like they will get to use it as much as your family will).

Is this you hoping to make some profit from this property/grow your wealth? Is your wife sentimental and wants to see this happen and you are supporting her? Are you just being very generous and helping someone (in-laws) because you can? Are you secretly hoping that your family will be able to keep 100% of this property in the future? Or is money burning a hole in your pocket?

This forum thinks there's a better way to achieve any of the above reasons without this deal. I'm only asking because it's really hard to justify your actions given the circumstances unless we know what your ultimate goal is. You will have resentment if the brother in law or the parents in law continue to use it the weeks your family wants to, or if the brother in law ends up inheriting 50% after not lifting a finger or a cent while you theoretically put 30+ years worth of time/effort/money into this property.

I'm not saying don't do it at all...but don't do it as it stands.

Best of luck!

The land is a very sentimental place for my wife and her brother. Years of memories growing up there and both households now have young children and they're getting maximum satisfaction out of bringing the kids to create new memories. I want to make my wife happy. This is what she wants more than anything else beyond what she has already with the family.

The house is beyond repair and should be condemned sooner than later.

But as stated, without me paying half the mortgage to rebuild a new place, FIL would just sell the place as is (for the land) or pay to get it demolished first, whichever made more sense financially - or let it sit there and bequeath 50% to each of his kids. They've already made it clear they're giving half of whatever they have evenly to each child.

But that is what I want. I want to keep the land in the family and have a new house on there that is comfortable. And while we won't be there but two weeks to one month a year, we can most definitely have a full service management company rent it out with the expectation it would subside most if not all the mortgage anyway.

For an update: my wife talked to her father and brought up the money in vs their land ownership, assumed debt and work. Specifically mentioned he basically owns it all. FIL proposed 1/3rd ownership to us and 2/3 for him. There's some other circumstances with BIL household I can't get into, but he's fine with this. If BIL can't/doesn't buy in later then In-law parents will leave still leave behind their estate to the kids 50/50.

I will be meeting with my tax person to see if there is anything I need to know about this ownership structure and have advised FIL to talk to his tax person and estate planner.

I definietly understand being a forum member and reading this and just screaming out how crazy this sounds but in the end, everyone wants to keep it in the family and get a nice new vacation home and it won't just happen without me splitting the mortgage + opex down the middle. Ownership shares = votes. FIL is free to give away any/all of his shares to BIL, or sell it, I don't care. In the end my wife and I got a huge gift with the ownership split.

Agreement is getting written up now by an attorney, it will be discussed, BIL will be on the call. Everyone (besides BIL) will sign the agreement and it will be done with.

Thanks everyone for the input, concerns, and advice.

[PMJL34]

Thanks for the update and for shedding more light to the situation.

Your family has made it's mind up and I wish you the best of luck.

BUT here's my unsolicited 2cents:

-This thing will NOT pay for itself.
-Your parents in law don't care about this property. They are fine selling it or leaving it to deteriorate.
-Your BIL is the worst offender here. He loves it so much that, even with a gigantic income, won't pitch in a penny. AND will get to use the property and get 50/50 ownership no matter what!?!
-Your wife (and you) are really the only people who care about this property (at least significantly more than others).

Ideally, this should be 100% done by the parents in law OR 50/50 between your family and BIL's family OR 1/3 each between parents in law/BIL's family/your family.

Either way, I hope that this goes smoothly and your family (and extended family) can enjoy the property for decades to come.

 

[Metalcat]

Thanks for the update and for shedding more light to the situation.

Your family has made it's mind up and I wish you the best of luck.

BUT here's my unsolicited 2cents:

-This thing will NOT pay for itself.
-Your parents in law don't care about this property. They are fine selling it or leaving it to deteriorate.
-Your BIL is the worst offender here. He loves it so much that, even with a gigantic income, won't pitch in a penny. AND will get to use the property and get 50/50 ownership no matter what!?!
-Your wife (and you) are really the only people who care about this property (at least significantly more than others).

Ideally, this should be 100% done by the parents in law OR 50/50 between your family and BIL's family OR 1/3 each between parents in law/BIL's family/your family.

Either way, I hope that this goes smoothly and your family (and extended family) can enjoy the property for decades to come.

100%, the BIL is the biggest fly in the ointment here.

[tooqk4u22]

Thanks for the update and for shedding more light to the situation.

Your family has made it's mind up and I wish you the best of luck.

BUT here's my unsolicited 2cents:

-This thing will NOT pay for itself.
-Your parents in law don't care about this property. They are fine selling it or leaving it to deteriorate.
-Your BIL is the worst offender here. He loves it so much that, even with a gigantic income, won't pitch in a penny. AND will get to use the property and get 50/50 ownership no matter what!?!
-Your wife (and you) are really the only people who care about this property (at least significantly more than others).

Ideally, this should be 100% done by the parents in law OR 50/50 between your family and BIL's family OR 1/3 each between parents in law/BIL's family/your family.

Either way, I hope that this goes smoothly and your family (and extended family) can enjoy the property for decades to come.

100%, the BIL is the biggest fly in the ointment here.

I disagree, it's clear that this isn't a priority for BIL or a way he wants to uses his resources.   Just bc he has money, why should he be obligated to do it.   And why wouldn't he get access to the house, it's his parents house afterall (well 2/3rds of it will be).   My parents would welcome me and family anytime to their house.   

And in the end the BIL will get 1/3rd not 50% when parents die and OP and Wife will get 1/3rd giving them a total of 2/3 when parents die.   That's when the real problems will start.

[GilesMM]

There almost too many red flags here to even name them all.

Family financial entanglements are almost universally disastrous at some point even without the in-law factor. This one promises to be a mess from construction through rental and beyond.  There will be terrible fights.

Vacation homes are typically financial mistakes made for emotional reasons (and later sold).  Your comment that you are doing this to make wife happy for sentimental reasons is concerning. Let her have her happy memories and move on.  This fiasco is likely to leave an ugly blot of the entire affair. FIL is the smart one here - sell and move on!

This is not a good time for either construction nor new mortgage loans.  Managing construction from afar is another huge mistake likely to lead to errors on the build and cost over runs.

Run away!

[Villanelle]

Do I understand correctly that they will leave their 2/3 to be split among the 2 offspring, so that you will eventually own 2/3 (your original third, plus one of the IL's 2/3s)?  Have you discussed at all what that looks like?  You are the majority owners.  Do you make all the decisions on expenses, and BIL is obligated to pay 1/3 of them?  Like, you decided to replace the roof for $10,000 when he wants to just repair for $800, and yet he has to write a check for $3300 of roof repair? When it it time to hire a property manager or replace the furnishings, do you get to make decisions and spend BIL's money (or 1/3 of his money)?    How will it work when scheduling personal use?  Will you split rental income based on 2/3?

Nightmare.  All of it.  This is the kind of thing that destroys family relationships.  Is having this cabin in the family worth more to your wife than having a decent relationship with her brother?  Because she's setting it up so that that will be her choice. 

Would you be willing to take 100% ownership of the cabin as the eventual inheritance, and then less of the other assets?  That doesn't solve all the problems, but it solves some of them.  ILs could stipulate in the will that you (your wife) gets their 2/3 share in the cabin, and then the FMV of that half of 2/3 is deducted from the rest of your share of things (assuming they have enough assets to make that work).  So if their share of the cabin is worth $500k, you take all of that as your inheritance.  That means you are in effect getting $250k of BILs share, so he gets $250k more of the remaining assets.  So if they have $800k in other assets, you get $150 and BIL gets $650, meaning in total, you each get $650 worth of inheritance.

Basically, it just mandates that BIL let you buy him out with part of the inheritance, in effect.  You do not want to co-own this with family, and especially not at an uneven split. 

[thisisjeopardy]

Ok, sorry everyone, I owe you all an update here. I've been very busy and I'm not just that very online type of person.

We got it all worked out. In fact, the original structure has been razed, footprint expanded and excavated, foundation poured, work in progress for building the frame.

What essentially happened:

- FIL handed over the deed to his kids (my wife and BIL) and said "do with it what you will, it's your property now"
- My household and BIL household formed an LLC
- transferred deed to LLC
- applied for financing from local lender in the LLC name
- appraisal from property value + builder specs/plans/designs came in a couple hundred thousand more than I was expecting! $550k more than what we're financing
- both households brought in a good chunk of money to pay builder directly to avoid borrowing more at high interest rates
- While my household will be paying MOST of this, BIL household as agreed to a fixed amount of money monthly to the LLC bank account.

We're tracking all money put in by both households and will recalculate the equity / ownership levels of the LLC annually. House should come online spring of 2024 and we'll be working with a full service management company to handle all of the short term rental stuff for us to subsidize payments / operating expenses/maintenance/repair.

Interest rates aren't that great (6.875%) but we can always refinance with a national lender / whomever can give us the better deal when rates go down. As explained earlier, this is my wife's dream and walking away or waiting years for optimal interest rates wasn't an option.

We're all happy with the agreement. We will need to consult with our tax accountant and have them show us how to properly account/track things, what can be written off, etc. Our operating agreement has us reserving income from rental to a cash emergency fund, then towards operating expenses, then towards the principal before we take income for ourselves. We can get a little over $1k+ / night during peak season. And to boot our oldest left daycare and will be in public schools (don't ask how much daycare is, but really expensive).

Thanks everyone for the advice and comments.

[Villanelle]

Ok, sorry everyone, I owe you all an update here. I've been very busy and I'm not just that very online type of person.

We got it all worked out. In fact, the original structure has been razed, footprint expanded and excavated, foundation poured, work in progress for building the frame.

What essentially happened:

- FIL handed over the deed to his kids (my wife and BIL) and said "do with it what you will, it's your property now"
- My household and BIL household formed an LLC
- transferred deed to LLC
- applied for financing from local lender in the LLC name
- appraisal from property value + builder specs/plans/designs came in a couple hundred thousand more than I was expecting! $550k more than what we're financing
- both households brought in a good chunk of money to pay builder directly to avoid borrowing more at high interest rates
- While my household will be paying MOST of this, BIL household as agreed to a fixed amount of money monthly to the LLC bank account.

We're tracking all money put in by both households and will recalculate the equity / ownership levels of the LLC annually. House should come online spring of 2024 and we'll be working with a full service management company to handle all of the short term rental stuff for us to subsidize payments / operating expenses/maintenance/repair.

Interest rates aren't that great (6.875%) but we can always refinance with a national lender / whomever can give us the better deal when rates go down. As explained earlier, this is my wife's dream and walking away or waiting years for optimal interest rates wasn't an option.

We're all happy with the agreement. We will need to consult with our tax accountant and have them show us how to properly account/track things, what can be written off, etc. Our operating agreement has us reserving income from rental to a cash emergency fund, then towards operating expenses, then towards the principal before we take income for ourselves. We can get a little over $1k+ / night during peak season. And to boot our oldest left daycare and will be in public schools (don't ask how much daycare is, but really expensive).

Thanks everyone for the advice and comments.

Interesting, and I hope it works out.  Have you discussed how decisions will be made?  For example, a 20 year old a/c dies.  It will be $1000 to repair or $7000 to replace.  Who decides if BIL wants to save money and you want to bite the bullet and replace something that has gone beyond its expected usable life?  What if the management company thinks you can get 20% more for the property with new furnishings and an upgraded bathroom, and you and BIL don't agree on whether to do that (or how much to spend on new furnishings, or even just replacement furnishings because short-term renters are hard on properties)?  These things are all solvable, but you should agree ahead of time, when it is just hypothetical, how they will be handled so you aren't hashing it out when there's real money at the heart of a disagreement.

Also, for your increasing share of the LLC, how is that calculated?  If you both bought in with equal amounts, you current split 50/50.  If over the next year you put in $6k and BIL puts in $1k, who owns what %?  It is just the 50/50 split, and then you calculate 6k/1k compared to the initial buy in?  Or do you in some way account for the fact that the 50/50 has grown and therefore a dollar from the initial buy in is worth more than a dollar paid one or ten years later?

And what happens if BIL wants to sell and you don't?  Or if you agree to sell but there's an offer he wants to take and you don't? 

Again, these situations can be accounted for ahead of time, but it is a massive mistake to wait to address them until they come up. And just because you agree now that you, as the soon-to-be majority-shareholder, have final say (or whatever you agree to) doesn't mean there wont' be resentment or hurt feelings, but at least it means you will have a clear path forward. 

[former player]

I've sort of been on the other end of this arrangement: the house I live in was owned by three siblings who had been given it by their father (the mum died and the stepmother wanted a new house) and had used it as a family holiday home for over 20 years.

Villanelle's questions about management and expenses are spot on.  My house had almost no maintenance, and certainly no upgrades, in all the time the siblings owned it -the only change they made was letting the original wooden windows rot so badly they replaced them with plastic, everything else was as it was when they were given it.  The garden was so neglected and overgrown that the estate agent didn't even call it a garden, just a "garden area".  The house was put on the market when one of the siblings wanted to sell, over the objections of the others, and threatened to go to court to force the sale.

I don't understand this constant recalculation of ownership shares?  A new house that cash-flows on holiday lets shouldn't need major money putting in: just make sure you have a nice big operating fund and only take out what is clearly not going to be needed to keep the place in order - I imagine a high-end holiday rental in Cape Cod could need constant expenditures to keep it in order for the top end of the market.

One or other party wanting to sell when the other doesn't is the big problem, and there is no way to prevent this.  All you can do is ensure that the other party has the right to buy the other share at market value within a defined period of being notified of the desire to sell, with a method in the agreement for determining market value at the time.

[Psychstache]

What essentially happened:

- FIL handed over the deed to his kids (my wife and BIL) and said "do with it what you will, it's your property now"
- My household and BIL household formed an LLC
- transferred deed to LLC
- applied for financing from local lender in the LLC name
- appraisal from property value + builder specs/plans/designs came in a couple hundred thousand more than I was expecting! $550k more than what we're financing
- both households brought in a good chunk of money to pay builder directly to avoid borrowing more at high interest rates
- While my household will be paying MOST of this, BIL household as agreed to a fixed amount of money monthly to the LLC bank account.

FIL is a genius. He saw a grenade flying through the air and got the fuck out of the way.

Seriously though, OP I hope things do work out, but as has been mentioned by many before and after this update, there are so ways for this to go to shit. I hope nothing comes of it and y'all can keep the piece, but I worry about the future of this situation.

We're all happy with the agreement.

At the moment.. BIL seems like he is fine until things will inconvenience him in ways he does not want. It feels like when any issues arises and BIL wants to renegotiate, y'all will have to bend since it is your wife's dream and you want to make it happen. Seems like a ripe space for resentment to grow. Hope I am wrong and I hope everything works out and you all get to enjoy the property and make wonderful memories, but keep a clear head about you from a business and personal standpoint on this.

[thisisjeopardy]

Not going to post the entire operating agreement here from the LLC but we have do have one, drawn up by actual attorneys to cover these hypothetical worst case scenarios everyone's assuming is a given. Apparently, some of you aren't aware of how that works or what one is.

Honestly, I'm glad I didn't post frequent developments here judging the responses. This is absolutely what everyone wanted. We can afford this without BIL if it came to it (just wouldn't be convenient), and FIL 'didn't get off a flying grenade' for fucks sake, he's recovering from a heart attack in his 80s and doesn't want to deal with the day-to-day business of working with a design firm.

[Metalcat]

I'm really happy to hear you've found a way to make this work that feels safe and functional for everyone involved.

[Villanelle]

Not going to post the entire operating agreement here from the LLC but we have do have one, drawn up by actual attorneys to cover these hypothetical worst case scenarios everyone's assuming is a given. Apparently, some of you aren't aware of how that works or what one is.

Honestly, I'm glad I didn't post frequent developments here judging the responses. This is absolutely what everyone wanted. We can afford this without BIL if it came to it (just wouldn't be convenient), and FIL 'didn't get off a flying grenade' for fucks sake, he's recovering from a heart attack in his 80s and doesn't want to deal with the day-to-day business of working with a design firm.

This tone seems entirely uncalled for.  No one is assuming these things are a given.  But we know they are a possibility.  If you've actually dealt with these specifics, then great. 

And yeah, I'd say most of us are well aware of what an LLC is and how that works.  That doesn't mean you've dealt with these specifics.  But if you have, then great. You didn't include that info in your post.   You asked for advice, you got it, and then you get pissy about it. 

[PMJL34]

lol

1. OP came in and asked questions.
2. We gave OP answers he didn't like.
3. OP said fuck y'all and went through with his plan anyway (which is perfectly fine. It's his life).
4. OP comes back a year later to tell us that he followed through with the plan we were not a fan of.
5. We tell OP again feedback he doesn't want to hear.
6. OP gets mad.

OP, I for one appreciate the update. What you are doing is fine. Many thousands of families do exactly what you are doing. All we're saying is that it's a high risk-low reward situation. Yes, people are being a bit harsh and negative, but that should have been expected.

Best of luck to you and your family. We hope your families make some nice memories and make some money on the side as well.

[former player]

OP, I for one appreciate the update. What you are doing is fine. Many thousands of families do exactly what you are doing. All we're saying is that it's a high risk-low reward situation. Yes, people are being a bit harsh and negative, but that should have been expected.

Best of luck to you and your family. We hope your families make some nice memories and make some money on the side as well.

The low reward is financial (in this forum's terms: although the gift of the property to the children makes a substantial difference), the high risk is to family relationships.  But: Cape Cod and family memories?  Probably not replaceable with anything else.  Even MMM himself is not against making an emotional decision about money as long as you know why you are doing it and what the consequences are.  OP is in a high-earning family: however this works out destitution is not in their future and being able to afford the involvement of professionals to set up the arrangement and run the property is probably the best insulator against the family relationships going wrong - it's when the finances are marginal that the risks are greatest.

If OP does want to spread his good fortune around there are charities that arrange holidays for disadvantaged children: those in care or with profound disabilities.  Donating a  week or two a year in the cottage to one of those charities could be lifechanging for the recipients.  Just a thought.

[clarkfan1979]

Not going to post the entire operating agreement here from the LLC but we have do have one, drawn up by actual attorneys to cover these hypothetical worst case scenarios everyone's assuming is a given. Apparently, some of you aren't aware of how that works or what one is.

Honestly, I'm glad I didn't post frequent developments here judging the responses. This is absolutely what everyone wanted. We can afford this without BIL if it came to it (just wouldn't be convenient), and FIL 'didn't get off a flying grenade' for fucks sake, he's recovering from a heart attack in his 80s and doesn't want to deal with the day-to-day business of working with a design firm.

From what I remember, I supported your original post based on the assumption that you get an operating agreement drafted by an attorney with experience in this space. You forgot to include that piece of information in your update. Because you didn't include it, posters assumed that you didn't do it.

I am considering doing something similar in the future. I would appreciate an update in a year after you are up and running. If you could include things that went well and things that didn't other people could use this information to make their vacation rental plans better.

[Psychstache]

OP, I for one appreciate the update. What you are doing is fine. Many thousands of families do exactly what you are doing. All we're saying is that it's a high risk-low reward situation. Yes, people are being a bit harsh and negative, but that should have been expected.

Best of luck to you and your family. We hope your families make some nice memories and make some money on the side as well.

The low reward is financial (in this forum's terms: although the gift of the property to the children makes a substantial difference), the high risk is to family relationships.  But: Cape Cod and family memories?  Probably not replaceable with anything else. Even MMM himself is not against making an emotional decision about money as long as you know why you are doing it and what the consequences are.  OP is in a high-earning family: however this works out destitution is not in their future and being able to afford the involvement of professionals to set up the arrangement and run the property is probably the best insulator against the family relationships going wrong - it's when the finances are marginal that the risks are greatest.

If OP does want to spread his good fortune around there are charities that arrange holidays for disadvantaged children: those in care or with profound disabilities.  Donating a  week or two a year in the cottage to one of those charities could be lifechanging for the recipients.  Just a thought.

It is replaceable with any other home/cottage in the area. It's not like there is an argument about the childhood memories of the cottage for the parents since the place has been demolished. It is an entirely new building. Granted, the gifting of the land adjusts the math, but a very quick search yielded hundreds of options in the Cape Cod area in the price ranges OP has discussed. If it were me, I would be looking at getting a place of my own and not risk the familial relationship.

[thisisjeopardy]

Not going to post the entire operating agreement here from the LLC but we have do have one, drawn up by actual attorneys to cover these hypothetical worst case scenarios everyone's assuming is a given. Apparently, some of you aren't aware of how that works or what one is.

Honestly, I'm glad I didn't post frequent developments here judging the responses. This is absolutely what everyone wanted. We can afford this without BIL if it came to it (just wouldn't be convenient), and FIL 'didn't get off a flying grenade' for fucks sake, he's recovering from a heart attack in his 80s and doesn't want to deal with the day-to-day business of working with a design firm.

From what I remember, I supported your original post based on the assumption that you get an operating agreement drafted by an attorney with experience in this space. You forgot to include that piece of information in your update. Because you didn't include it, posters assumed that you didn't do it.

I am considering doing something similar in the future. I would appreciate an update in a year after you are up and running. If you could include things that went well and things that didn't other people could use this information to make their vacation rental plans better.

UPDATE:

The house is built, nearly ready to move in. This has gone mostly smooth. My wife and I have leverage because we've paid way more in and there were some minor disagreements but nothing terrible or even bad. All money in from pre-construction engineering, to builder invoices, to insurances, LLC costs, solar company, etc, etc is tracked. BIL family agreed to pay a fixed amount monthly (what they can afford) into the LLC bank account, we cover the rest, which is way more but we track proportional equity.

One thing I would've done differently, knowing what I know now is - and this was in the LLC Operating Agreement - was to hold bi-weekly meetings and keep meeting minutes. Go over old business, new business, etc, your basic Robert's Rules and typical board room stuff. We do this now, but had we done it from the start it would've saved some time, prevent some things falling into the cracks, avoid misunderstanding, etc.

We will be doing short-term rentals to help pay for this. This could be a source of contention for people wanting to use the house on certain days, that is an agenda item to discuss (and mostly both households will be there at the same time anyway but still, getitng a defined process documented).

Regarding taxes: we havn't taken on rental income yet but will in 2024. Furniture isn't in yet either, so my accountant decided it was best to wait until next year. I will be getting all expenses into Quickbooks or similar so I can export data to them. They will calculate all the deductions on things retroactively and currently and provide a tax form (a schedule k I think?) for my BIL showing his share of tax credit/liability proportional to his equity that he can share with his tax preparer. So the tax part appears to be seamless.

One thing we did that wasn't really Mustachian is we engaged with an interior designer, a service from the rental management company, b/c we live a couple hours away and just don't have the bandwidth to be up there multiple times as the deliveries come in. Or store it ourselves and rent a truck. They take a decent % of the cost of overall furniture but manage all deliveries, do the installation and setup.  They do pass on vendor discounts and we of course can compare to retail and also will have some things we can transport ourselves.

As a refresher, the land/crumbling (barely inhabitable) cottage was all owned outright, cottage removed, new and bigger house constructed. The bank appraised it at a couple hundred thousand dollars more than what I figured the best case scenario would be so that was a very pleasant surprise. This is a very popular tourist area so unless something cataclysmic happens, our safety net and golden parachute would be to sell the property and would make money on the whole deal after paying off the loan which is the absolute last ditch resort if somehow our nest egg runs out, multiple job losses, etc.
 
This has been a long and painful process. Not because of the multiple ownership stake and family, but the entire process in general of engaging and vetting a builder, looking for financing (and deciding how much of our capital do we put up), working with the overall design of the house, cabinet design/selection, appliance design/selection. Countertops, tile, flooring in multiple rooms, etc. Shower styles, vanities, lighting, Landscaping (man was this a chore), working with the septic vendor, solar company (that permit has been held up by the town for some reason I still need to get the solar company to tell me why), furniture selection, decor, etc.

I hope maybe this can help someone else in a similar situation. We really wanted to a have multi-generational family home in something new and nice to replace the absolute dump that was there before. Forming an LLC with an operating agreement, company meetings to define processes, set boundaries and establish agreements, but none of this would work if the two households don't love and trust each other. It only worked because of that and we're all fiscally responsible and don't have any bad habits or marital problems, or personality disorders, etc.

[thisisjeopardy]

I also forgot to mention that of course we got a business credit card with promo offer. I'm considering adding another as we'll easily hit any conditional bonus offer, multiple times over. We also came in at or under budget on all of the allowances the builder outlined, which was nice.