Financing a Home with a Partner

11 Replies

Good day all! 

I have a question in the best way to go about purchasing a home with a partner. 

Quick Background:

Bob - would be 2nd home

Tom- would be his 1st home (willing to live in home as primary)

What would be some recommendations in terms of finding a loan? 

-Should Bob and Tom both get a loan together? 

-Since it's Tom's first home could he just put the loan under his name to acquire a FHA loan and then just put the title under both Bob and Tom?

Thanks! 

-Jared

I am interested in this same situation. One investor lives in the property. how do you structure the partnership?

I would recommend that you first determine what is each person's role in the deal and what are they brining to the deal.  If one person guarantees the loan, then there needs to be a separate agreement between the parties (outside of the loan itself) detailing who is responsible for guaranteeing the payment of the loan and what happens if the loan is not satisfied.  I prefer to not personally guarantee loans, but instead to use hard money or private money (in the business' name) and use partner equity for the balance of the purchase.  I am in the process of structuring several of these types of loan, so email me if you have specific questions.

God Bless You!

@Jared M. Simple way and the best loan terms would probably be for Tom to do a standard FHA owner/occupant mortgage. Once the sell closes, Tom can simply deed the land into a trust listing both Bob & Tom as beneficiaries. The trust can be used to determine who has what % of beneficial interest.

It's a very clean transaction and you can do it yourself.

@Michael Evans  Thanks! 

@Hattie D. After Tom deeds the land into a trust for both, is the cashflow received from the property(in the future) written out on the trust or is it something to be settled out between the two? and thank you so much!

@Jared M. The Trust is only for the purpose of holding title and - in this case - determining interest held in the property. I suppose, if you completed assumed name paperwork, you could operate in the name of the Trust. However, you wouldn't normally do that. I'm not a lawyer, so this isn't legal advice. (Required disclaimer!) If you are using a Trust, which clearly identifies who holds what percentage of beneficial interest in the property, you could get by with just writing up a simply agreement between Tom & Bob, filing assumed name papers and opening an account. However, if Tom & Bob intend to purchase additional properties together, I recommend they form an LLC and make everything clear. Plus, if you form an LLC, you can have it taxed as a Sub-S corp. That allows you all the protection of a corporation and all the tax benefits of Sub-S pass-through taxation. (Not a CPA either...just saying.)

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@Hattie D gives some great advice about the use of Land Trusts and LLC. Every piece of property should be in it's own Land Trust and you should have an LLC for each type of asset class you are investing (this goes to money management, which is a subject beyond this post). You want each investment to be independent of each other so that if one goes south, it goes south by itself and doesn't;'t affect the others. Some call this diversification.

Ranchinskiy Vasily: there are many private money banks/opportunities for investors to pool their money to lend to investors (whether they be real estate investors, stock market investors or business investors).  We run a private money investment service, so if you're interested in the types of deals we invest in, send me a private message.

God Bless You!

What are you goals? Are you trying to make this an investment or a business deal? My husband and I have been very successful turning housed from personal properties to rentals when we leave due to military orders. I personally would put the house in one person or the other. This would allow you to buy more houses.

@Hattie D., I am wondering about the ethics around handling an FHA purchased property that way. Would you mind speaking to that a little (do you think it's a grey area, a non-issue, or ???). Am I understanding correctly that deeding the property into a trust with both parties as beneficiaries is a way around the FHA requirement that all parties who are on the mortgage occupy the residence? Are there legal ramifications in a transaction like this?

Many thanks in helping me get a handle on this!

@Stacey Olson  Great question! 

If you watch my posts & my blogs, you'll never find me pushing any strategy as a "way around" anything.  I believe in total transparency.  And, if it can't be done ethically, I don't want to be a part of it, because I have to look at myself in the mirror every day.

That said, in this situation, the assumption was that Tom was the only guarantor on the mortgage and that he would be living in the property, at least for some minimum period of time, which is in keeping with the FHA requirements. Therefore, Tom pledging a portion of the beneficial interest in the property using the Trust is really no different than if Tom got married, after purchasing the property, and had his wife added to the deed.

The only reason I would recommend this route is because, Tom was willing to meet the owner-occupant requirements of the FHA mtg. By doing so, it allows Bob & Tom to benefit from the uber low down payment requirements and the sweet terms of an FHA insured mtg. If your circumstances are such that you can purchase a property using FHA, live in it for a year, buy a new FHA home, and rent the first one...lather rinse repeat up to the max allowed FHA insured mortgage holdings...that's a really cheap way to get into buy & hold REI. You could then begin converting those into convention mortgages to allow yourself to acquire new FHA loans or, once the occupancy period has passed - an assuming you had a good deal going into a property - you could sell a property and use the profit to purchase additional properties.

I hope that answers your question.  Feel free to ask follow ups or PM me with other thoughts.

Hattie

@Jared M.  - Few things I would worry about

Will the partnership keep some cash in its bank account? (it should, six months rent, minimum, IMHO)
- When will the partnership distribute money? Who decides?
- Who's on the checking account? Are both of you required to sign checks?
- What if you have a major expense and the partnership doesn't have enough money in the checking account? Presumably, then two of you kick in the cash. But what if one of you cannot? If the other person has to kick in more, does that change the capital accounts of each of you? Or, is it a loan from one of you to the other? Or what?
- What if one of you desperately needs money?

What if one of you thinks something needs to be done to the property and the other doesn't?
- What if the tenant calls one of you with an emergency and you can't get hold of the other to make a decision?

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