3.6 Group Investment

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something and hurts themselves on your property, they can sue you. It is much better to have it in a corporate name. This gives you another layer of security.

The question of type of corporation is completely determinant on what you’re purchasing, and with whom. For example, there are eight golfers who want to buy a home together. They want the greatest golf home you can build. It’s three fl oors high, and it’s got a golf simulator in it, and they want to use it for four months out of the year. Then, they will rent it out for the remaining eight months of the year to other groups of golfers. They want to be very specifi c about who their rental goes to, and they’re all prepared for it.

They’re going to have a completely diff erent corporation or a partnership—a corporate entity—then a husband and wife would have. A skilled lawyer will help them draw up an agreement that dictates, for example, if the individual eight owners will be able to sell to an outside party. Or if they have to sell to somebody on the inside, or if they’ll have to have committee approval for it. There is a pretty wide array of ways of structuring your business entity, from LLCs to corporations to LPs. Talk to an attorney, an individual who will be a key part of your VRP team.

3.6 Group Investment

There’s a distinction between a group investment and individual (or family) ownership of VRP, and it’s relevant to this chapter of the book because when you embark upon a group investment, you’ll need to be very careful when you set up your business structure.

What happens with group ownership is this: the typical buyer is a family looking to have a vacation home and rent it out when they are not using the property. In some cases, they can’t aff ord the property they want to buy. However, they don’t want to back off of the quality, size, or desirable location. Some people want privacy, they want higher quality fi nishes, they want a more expensive home, and they want a better cap rate.

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Also, this particular family may be aware of the fact that in the luxury market, the economics of running a VRP are better. Owners can sustain a lower occupancy level and have a higher average daily rate, which allows you to weather crises and bad seasons. Plus, the economics of renting out a luxury home, which is anything a million dollars and up, simply work better. With that lower occupancy rate comes a lower overall level of wear and tear expense. As a result, the owner or owners have more pure net income. You’re not grinding the house away to meet some form of cap rate. Plus, you’ve got a nice home, in a nicer community, and nicer amenities, and nicer services for your family to use. So, buying a luxury home is often a better call.

Since a single family might not be able to reach that $1 million purchase price number, they call up their aunt, or they call up their brother. Once that happens, you’ve got the power of two families. It’s all a question, after that conversation, of what kind of vehicle the group will use for ownership in terms of business structure.

If you are interested in group ownership, you’ll need to plan on having many conversations and meetings with an attorney.

That said, group ownership might be a great option for you. What you all get out of that is your family will use this property two months out of the year and the other family will also use it two. So, two families will use it three to four months out of the year. You still have over 50 percent of the time to devote to short-term rental occupancy. Bottom line is it allows your families to reach a better quality of product to use, and a better quality of product for resale.

Of course, setting this up correctly and thoughtfully in terms of business structure is the key. It can go wrong for the same reason that any real estate investment can go wrong: death, divorce or disaster. If you have a death in the family and ended up in the wrong corporate setup, you may be facing unanswered questions such as, “Who does that property pass to? Are they as participatory with our family as the original family member was? Are they as collaborative or not?”

Sometimes, people get into a battle. One of them wants to sell it; the other one doesn’t, but the particular kind of vehicle they’ve set it

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up in doesn’t allow it or has a fi rst right of refusal, perhaps, by the other owner to purchase it. Then there could be a battle about price, and value, and it escalates. You get egos involved. Nobody will battle like family members. Confl ict can also happen with people who reach out to partners who are not related to them.

I’ve seen it happen where the legal costs are so high that both parties just liquidate the home at a loss when cool heads would have made things happen fl awlessly with such ease.

Any time you get a group of people together—two, three, four, fi ve—problems can happen. So, it’s very important on group sales that when you enter into a buying agreement, you enter into it under a corporate vehicle that provides for every contingency:

• Divorce • Death in the family • Disaster such as job loss or signifi cant property damage • Debt

You will need that layer of safety and security for the shareholder (stakeholders) in whatever that corporate vehicle may be. Once you get this step right, you eliminate the potential of something terrible happening. The worst that can happen is you sell your share and you’re not making income anymore, and you can’t use it anymore.

Don’t think of a group investment as a partnership. Think of it as a business entity with stakeholders. Anything can happen.

Group investments can work out beautifully. I recently worked with a group of eight golfers who wanted to purchase a VRP together and have now formed a corporation. It’s the right type of corporate vehicle that fi ts the contingencies that they see happening. They’ve gone about it like a business investing in a hard asset. They have hired an expert to write a policy of rotational use over an eight-year period. It gives them all equal benefi ts every eight years; they can deviate from the set schedule by exchanging with each other. They have also

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worked with the general manager of the hotel associated with their VRP community to tie particular tee times to certain times of the year. The hotel benefi ts from this level of planning because they get guaranteed revenue ahead of time for their golf courses.

Here’s another example: I recently met a group of four families that were here in Central Florida on vacation. They’re looking at $300,000 to $400,000 condos. Just for fun one day, they walked through a $1.8 million home with eight bedrooms. They just loved it. The kids were running around, going back in the park. It fi t them so perfectly. So, they asked me, “Can we all buy it?” I said, “Yes. Just make sure you get the right kind of legal advice on it.”

Those four families together were able to get debt on the property of about 70%. In this particular case, they’ll need a down payment of around $400,000. So, each family has to come up with $100,000 instead of one of them coming up with $400,000 in cash. That’s a lot more reachable for people. Also, most people individually wouldn’t qualify for a loan of $1.4 million, $1.5 million. Four of them together do qualify.

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They’re all getting what they want. They’re all going to use it a month out of the year, and that leaves 66% of the year that this beautiful home can be rented. They all have now an asset that they can use, and they’re using it for free because it pays for itself, and they’re all making some income. It’s paying down its debt. Who knows? Maybe they will go over to Las Vegas and do this again, or maybe they will fi nd a beach somewhere that they all love. They’ll say, “That worked the fi rst time. Let’s do this again.” This could also form wealth for all of these families. It doesn’t have to be done solo.

One person or family could be a member of many diff erent partnerships. You don’t have to do it with the same team every time. What you’re going to see going forward, I think, are buyers’ clubs for VRP.