Partnership w/ Dad - LLC or no?

Question

So I found what I think is a great deal. It’s about 2 hours from me in the town I went to college in but not where I live locally. According to the agent I called, she said it has 4 1-bedroom apartments. It’s in downtown 2 blocks from college st so it’s walking distance to campus. Each apartment is renting for $750/month, and the list price on the property is $190,000. I don’t have enough saved for a 20% down payment so my dad is wanting to partner with me on this deal. I own my own house but I’ve never bought an investment property so I have some questions about the best way to move forward.

1) I have a great relationship with my dad. Is it a bad idea to go into business together?

2) I don’t have enough personal equity to need an LLC for my first rental but my dad owns another business. Should we form an LLC together to protect his assets?

3) Do we need to form the LLC prior to making an offer on this property or just prior to closing?

4) If we start the process of forming an LLC Monday, will we have time to get it all set up prior to closing?

5) I’ve read that it’s difficult to get financing through an LLC. We only want to put 20% down. Will an LLC cause us problems in that case?

6) If we don’t have the LLC formed prior to making an offer, can we purchase from a different entity than the one that the initial offer came from? (Don’t want the deal to get away but also want to make sure we’re doing the legal stuff right).

Thanks for any help or advice on this! I’ve been searching for deals so long, I wasn’t really sure at what point the legal stuff should happen in comparison to moving forward on a deal.

Tanvir Sattar · Answer

@Lori F. I think this is a great opportunity to increase your family's wealth. You and your dad will probably teach each other a few things along the way too. For my first property I did something similar with my father and it was a great way to learn the rental business.

David M. · Answer

@Lori F.

1)  Going into business with family is a personal choice.  Is the nature of your relationship able to handle doing business?  is there enough trust?  If you have a major argument over something, will you still "merrily" sit down for Thanksgiving/Christmas dinner?  For some it works, for some it doesn't work.

2)  If you want, I give a bunch of prior posts on LLC's.  For a family investment, you might be fine with just doing it yourself.  Otherwise, there are no tax advantages of using a legal entity such as a LLC EXCEPT when investing with a non-spousal partner.  The issue is apportioning the profits/losses.  If you don't have a problem with that, then the LLC isn't necessary.  Furthermore, on the topic asset protection, many investors invest with their personal names (I think the highest # I've seen on BP is a person who said they had 50+ residential properties in their personal name).  If you can keep the properties in good repair, buy landlord and umbrella liability coverage, you probably will be okay.  However, I don't know what additional liabilty there might be a bunch of potentially drunk college kids in the unit.

3) Typically, you writeup the offer with the buyer as "Lori F. or an entity to be formed."  This way you don't have to create the llc earlier than you have to.  Usually, you start it after you go under contract.  Typical approach is to name the LLC the street address of the property.  makes it much easier to keep track of...

4) LLC formation differs state to state.  In NJ, i can do it online in ~15 min (more seasoned professional less) and about ~$125 charged to my credit card.  As I recall, in NY you need to actually publish something with the State or the local newspaper or soemthing??  Some other States I've heard you actually have to send in your Operating Agreement to be recorded by the State.  I don't believe it takes longer than 4 weeks start to finish.

5) 20% down is fine with a LLC.  The issue is that a legal entity is not eligible for conforming residential financing.  You need to obtain commercial financing.  The vast majority of loan agents are residential agents so they will tell you to take Title in your personal and deed to the LLC after closing (lots of people do it but its really a bad idea).  The loan agents are sales people.  They want to sell you a loan.  They have little, if any, fiduciary responsibility to your LLC (especially since you, not the LLC, are their lcient).  So, seek out commercial financing which is more expensive and usually worse terms (e.g. 30 year payment schedule but say 15 yr term / balloon payment, so in 15 years you have refi or come up with the cash to cover the remaining principal).  This is why most people try to get around the commecial financing.  But, if you want the liability limitation of the LLC, the mortgage really should be under the LLC.  The limited liability is only for what the LLC "owns."

6) see #3 above, and check with your State laws...

With everything above, consult a qualified professional or two...

I know its a lot.  I'd be happy to chat if you like --- just send me a direct message.  Good luck.

Davis Reese · Answer

@Lori F.

I am about to do my first 1031 and then do my next deal with my dad. There is a level of comfort that comes with us working together. I think it is all personal preference as far as working with family but we will not be forming an LLC and instead will get an umbrella policy. The best advice will come from a professional but being in similar situations I will be interested to hear how it turns out. Best of Luck!

Brett G. · Answer

@Lori F.

As someone with adult daughters, I say go for it!  Regarding to LLC or not, that can be done now or later.  Whether or not you need an LLC has been debated quite a bit on this forum.  Some folks opt for good insurance, such as an umbrella policy that would cover potential issues.  If your dad has an umbrella insurance policy, that can be extended to the rental.

For financing options, try the smaller, local banks.  They may be able to do in-house mortgages that have less restrictions, especially for lending to LLCs.  Their terms may not be as good, but you have much more flexibility.

You could initially purchase in father and daughter names, then switch the property to the LLC once that is ready.  I personally wouldn't let that hold me up on a good deal.

Good luck and happy investing!

Partnership w/ Dad - LLC or no?

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