Co-owning a vacation home can be a great way to obtain a second home without the hefty price tag. When a vacation home is also rented to support this investment, it’s important to have a plan in place for how rental income will be distributed with co-buyers.
There are two main options for distributing rental income in a co-owned vacation home:
- Allocated weeks: In this model, each owner is allocated a certain number of weeks per year that they can use the home for personal purposes. Any weeks that are not used by the owners can be rented out. The rental revenue from these weeks is then distributed to the owners according to their allocated weeks.
- Pro-rata: In this model, all of the rental revenue is collected by the LLC that owns the property. The rental revenue is then distributed to the owners pro-rata, based on their ownership share.
The best way to distribute rental revenue will depend on the specific circumstances of the co-owners.
Some co-owners agree as a group to set aside a certain number of weeks for rental. We see this a lot with “let’s rent the high season, since that is when the rent is the highest, and we’ll take it back for personal use in the low season.” In this situation, it’s better to centralize the income and distribute it evenly pro-rata according to ownership. If the co-owners have different usage patterns (i.e., one family uses almost all of their weeks, and the other family rents almost all of theirs), it’s better to keep good records and distribute the income by allocated weeks.
We’re fond of saying here at Plum that we don’t care what the rule is regarding rentals and revenue distribution… but that we care a lot that there is a rule and that it is written down at the beginning, before ever buying a home.
This will help to avoid any conflict or confusion down the road.
Here are some additional tips for distributing rental income in a co-owned vacation home:
- Create a written agreement: It’s important to have a written agreement that outlines how rental revenue will be distributed. This agreement should be signed by all of the co-owners. If you choose Plum to help you with co-ownership, you will be using our SHARE Operating Agreement (Shared Homeowner Agreement for Real Equity). We’ve spent thousands of dollars getting it dialed in so that you don’t have to re-invent the wheel.
- Set clear expectations: The co-owners should discuss their expectations for how rental revenue will be used. For example, will the revenue be used to pay for maintenance, repairs, or upgrades to the property? Or will it be distributed to the owners as income? Here again, we facilitate this with the Group Consensus Builder, and lock the decisions into writing using the SHARE Operating Agreement.
- Be flexible: It’s important to be flexible when it comes to distributing rental revenue. The co-owners may need to adjust the distribution plan if there are unexpected expenses or if some owners use the home more than others.
By following these tips, co-owners can ensure that rental income is distributed fairly and efficiently. This will help to maintain a positive relationship between the co-owners and ensure that they all enjoy the benefits of owning a vacation home.
Do you have any questions about how to distribute rental income in a co-owned vacation home? Feel free to reach out to a Plum Concierge for a discussion!