Forming a Partnership

2 Replies

Hello and thank you for reading and commenting on this post! My question might be a little long and there are several parts to it as well.

Background:
I am new to real estate investing, green as green can be, so I have been doing my due diligence and reading, listening to pod cast, and form searching on the subject of landlording (BP is an awesome information site) to learn as much as I can. I have established a LLC for some added protection because I wanted to be prepared in case an opportunity where to suddenly arise.

One aspect I never really bothered to look into was forming a partnership with others. Now a partnership opportunity has presented itself as an option to start investing sooner than I planned. I was able to find two other investors that are interested in doing at least one deal together. Us three would share the precedes and proceeds together and my LLC (JMS property and investment) would be the property management company. Both people are highly, highly trust worthy and honest people. Before I saw a lawyer I wanted to see if I could get a little incite as to what some basic options my be.

Questions:
Is there a right and wrong way for us 3 to purchase the property together (I am sure there is a list a mile long of the wrong way to do it)? When we purchase the property can I still use my LLC to purchase the property on my behalf (the other 2 going in on the deal are purchasing as individuals and not corporations)? How would getting a loan work between all of us, with one being a corporation? Again I am just looking for some general thought, ideas, and personal incite. Thank you.

I would not use your existing LLC unless that's newly created and has not been used for any purpose. Instead, create a new LLC specifically for the partnership. Everyone puts their money in, the LLC buys the property and runs it, prepares its own tax return and pays out the profits (if any.) You can get a loan in an LLC. Not a 30 year fixed rate loan, but a commercial loan. May have a shorter term, slightly higher rather than conventional and may have ARM or balloon terms.

You LLC can be one of the members of the new LLC. No problem there.

Spend some serious time working out an operating agreement.  Who does what?  Is there any compensation for the members labor? How are profits divided?  What if one of you dies?  Or divorces?  Or marries?  Or desperately needs cash?  What if the partnership needs cash? Try to think through every possible scenario that could happen with the property or any of the members and write down now what you will do.  If you can't agree now, you won't be able to agree when the problems arise.  You should assume that you will end up fighting each other in court as you're writing the operating agreement.

@Jon Holdman  undefined

 This is perfect! I truly appreciate you taking the time Jon and helping me out with this. Now at least I have some general guide lines to follow when I start drafting up our agreement I will write it up as if we we will end up fighting. As we always said in the Marine Corps, "hope for the best, plan for the worst."

Regards,
James

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