Starting a partnership

3 Replies

I'm looking to start a partnership with a friend.  

He is a Navy Officer in the Jacksonville FL area and I have known him for 20+ years.  He is new to RE, but has is an educated Navy Officer looking to do something on the side. He currently owns a primary residence so he knows the ins and outs of owning property.

I currently own 3 properties in a major metro area in NE and looking to diversify to a more affordable area.  I can't keep buying 400K+ properties so looking to slowly diversify in FL (100K properties).  I have self managed my properties for 5+ years and would say i am moderately experienced doing all rentals, property management, contracts and other related responsibilities.  

Wondering the best way to structure a corporation with my friend.  We are looking to go 50/50 on a conservative first property and potentially build from there.  Neither of us are looking to profit on this venture meaning we will not be paying our selves, but reinvesting all profits back into the company.

I'd like to form some sort of formal corporation before we move forward: LLC, S corp, ETC. Any recommendations or feedback from similar situations would be greatly appreciated. I have about 800K in assets and he has about 300K. We are looking to invest about 20-30K to start off or potentially do a cash deal on a foreclosure.

He knows the area in Jacksonville and we would be targeting college students, young professionals, and military personnel (which he has a lot of experience). My experience is value add properties.  I have a degree in finance and would manage all of the financials and strategies. He is a hands on guy who would do the maintenance and networking with local experts.

Originally posted by @Aaron Mariano :

I'm looking to start a partnership with a friend.  

He is a Navy Officer in the Jacksonville FL area and I have known him for 20+ years.  He is new to RE, but has is an educated Navy Officer looking to do something on the side. He currently owns a primary residence so he knows the ins and outs of owning property.

I currently own 3 properties in a major metro area in NE and looking to diversify to a more affordable area.  I can't keep buying 400K+ properties so looking to slowly diversify in FL (100K properties).  I have self managed my properties for 5+ years and would say i am moderately experienced doing all rentals, property management, contracts and other related responsibilities.  

Wondering the best way to structure a corporation with my friend.  We are looking to go 50/50 on a conservative first property and potentially build from there.  Neither of us are looking to profit on this venture meaning we will not be paying our selves, but reinvesting all profits back into the company.

I'd like to form some sort of formal corporation before we move forward: LLC, S corp, ETC. Any recommendations or feedback from similar situations would be greatly appreciated. I have about 800K in assets and he has about 300K. We are looking to invest about 20-30K to start off or potentially do a cash deal on a foreclosure.

He knows the area in Jacksonville and we would be targeting college students, young professionals, and military personnel (which he has a lot of experience). My experience is value add properties.  I have a degree in finance and would manage all of the financials and strategies. He is a hands on guy who would do the maintenance and networking with local experts.

 First of all, he knows owning a residence, NOT owning a rental.

Second, you will pay tax on the profits. You may want to consider a strategy such as Cost Segregation to help lower your taxable income and maximize current year deductions to generate a loss that will carry over.

Third, You NEVER want to hold rentals in a corporation.  

Fourth, You don't want to get married to someone and not be able to move away easily later on.

Aaron:

I agree with Steven's points. You have a lot more experience than him and owning your own home prepares you in no way for being a landlord or a RE investor. 

You have to think really hard about this friendship and is it worth the strain. There will be times that you will disagree on things. 

I would put each investment into it's own LLC with shares divided based on either $ amount input or just make him a non-voting member or less 50% owner of the shares so you can take charge. LLC profit and loss will flow onto your tax return and they are usually a lot less money to set up. A Corp -S or C have a lot of recording issues you have to do. Use them later when you have 5-10 homes and then that S or C corp becomes the management corp for the LLC's.

Spell out in detail within the operating agreement of the LLC what happens when this happens, or when that happens. Who is going to do what, when, how a tie in to be broken, things like that. Decide all that stuff now while you have cool heads, if you don't and then try to do it when tempers or emotions are high, well it will not be nice. How do I know that.

And then if you do this, after each investment is done/sold get together and talk out the points of disagreement, if any. And then decide if you are going to move forward on the next investment together. 

Thank you both for the feedback. Im not in any rush to start this partnership so it looks like I will take my time to do additional research and look into your recommendations.  Thanks guys for helping me on my first post!

Aaron

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