Purchasing property with a friend - LLC?

Question

Hello all,I am interested in purchasing an investment property  with a friend.  I was initially thinking that we would create a LLC but  it seems that it makes finding a lender more difficult.  We would be  looking to purchase a single family home so a 30 year fixed mortgage  would be ideal.  Has anyone done anything similar and could you share  your experience?  Is there another way like a joint venture document and  then umbrella insurance?  This would be my first investment property so any advice would be appreciated.Thank you,Sonny.

Will Barnard · Answer

You need an agreement spelled out between the partners so in my mind, you have two main choices, do an LLC with a good operating agreement or do a joint venture agreement and have each of you on title as separate entities. When you get the loan, simply get it in your name and then transfer to the LLC, make sure you also transfer the hazard insurance policy into the new entity name as well! Do not worry about the DOS (due on sales clause), no lender is going to exercise that right. I have done this many times and no of many others who have done it many, many times.

Your concern should be your agreement between the two partners and the fact that you are new (so get educated and buy correctly).

Will Barnard · Answer

Yes, I am saying don't worry about the DIS when you transfer title into an LLC.

By separate entities, I mean you and your partner each have your own LLC or you are both named in your personal names on title as tenants in common. In such a case, you need a joint venture agreement. No I don't have a template and even if I did, you should not use it as you and your partner have different situations than me or anyone else. Your agreement needs to spell out every detail as far as who does what, who puts what money in, how profits are dispersed and in what order. What happens if one partner dies, etc, etc, etc, etc. . . . .

Joshua Springer · Answer

Within the past 2 days i've been in contact with a half dozen local banks/credit unions that will lend to an LLC...however you will still have to be a guarantor on the loan AND the loan terms will not be as good...most places only have ARMs and shorter amo periods.  Call around and ask but I do doubt you'll find 30 year fixed...MAYBE 25 years probably around 5.5-6.5% with good credit.  Expect 20-25% down.

As far as the LLC in most states they aren't terribly expensive to start if you do the paperwork yourself.  I'd go ahead and start one if you think you'll do any business in the future.  Some places might require your LLC to have multiple years of tax returns before they get into bed with you.

Sonny Sach · Answer

HI Karen,

The agent provided me with his team's contact - lawyer, accountant, lender  etc. but I wanted to check here and get an idea of how frequently this has been done.

Thank you all for your responses.

Sonny

Karen Margrave · Answer

@Sonny Sach First off, you need to understand better what it is you are doing before jumping in.

1.  Why are you taking the "opinion" of a real estate agent when it comes to loans, are they also a mortgage broker?

2. The way in which you take title has tax implications, so make sure you know what it is you are doing, and how it will affect you in the long run. Talk to your accountant or to a real estate attorney. Ditto with the LLC, and any other partnership agreements.

Unless you are experienced it's always cheaper to pay for professional advice than learn from the school of hard knocks!

Joshua Springer · Answer

Random update to my thought above...found a bank that will amo over 30 years while closing under LLC!

Sonny Sach · Answer

Hey Will,

So to be clear, you are saying that I should not worry about performing a quit claim?  Could you also explain what you meant by being separate entities on the LLC or JV?  Is there a template for LLC or JV that you or your colleagues have used?

Thanks,Sonny

Sonny Sach · Answer

Hey Curt,

I heard that the banks can accelerate your payments if you do a quit claim.  Its not common now but used to be in the 80's when interest rates were rising.  Also, as you mentioned, its hard to find a lender and the rates will be higher with an LLC so I am trying to look for alternatives.

Joshua,

A real estate agent told me that it would be hard for an LLC to get a 30 year or even 20 year loan.  He said probably a 3-5 year arm with a balloon payment which I am not interested in.

I guess I am just trying to see what anyone else in my situation did and what was there experience.  I am hoping that maybe we can just create a joint-venture document and get an umbrella insurance policy.  That would make things simple.

Thank you both,

Sonny

Curt Davis · Answer

You can both buy the home with a lender and then quit claim it to the LLC after you close.

No lender will make a loan to an LLC, almost impossible to find this.

Good luck

Purchasing property with a friend - LLC?

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