Ok so I have a more practical question about how the deal is actually set up. I have a partner I want to invest with. What's the best way to buy/set up the deal. Assuming 50/50 cash contribution and split of profits/losses.
Do we buy a property jointly? Can only one person get the mortgage? How does the other contribute.
Any advice greatly appreciated!
Not legal advice, but look into using an LLC. A Limited Liability Company allows profit and loss percentages, as well as equity, allocated to each partner. See Form K-1 1065 filing
The downside I that if you want to finance your acquisition, it is more difficult to get traditional (read as government subsidized) loans.
Hi @Molly Mathias
Note: Not a legal advice. Please do your own due diligence
There are multiple ways on how you can structure the deal. Two common ways to do are listed below.
Both you and your business partner would apply for the loan (if applicable) and will take title of the property in both your names. Doing this will show the property as a liability under both your credit reports. There are pros and cons of doing this..High level Pros - lower interest rates, more financing options, easier in the short run. High Level Cons - Assuming you plan on buying more you won't qualify for more loans as the banks will look at your DTI (Debt to Income) and if your Debt is higher it might impact your purchasing capacity to buy additional investment properties. You can also have one person apply for the loan and other person brings their portion to the closing table and have a second lien position on the property or use a promissory note
Buy Under an Entity
You and your business partner can setup an entity (costs ~$300 -$650 assuming normal scenario). You create an operational agreement (please have a licensed attorney) review your operational agreement. You can assign shares or allocate ownership. There are Pros and Cons to this approach. High Level Pros - risk mitigation (in some form) people can still sue you if they want but it comes down to asset protection (personal vs. business), you can buy multiple properties under "commercial"/small business loan i.e. under an entity where you and your partner promise to pay the loan/meet obligations. High level Cons - not many banks provide loans under an LLC, interest rates are 1%-2% higher than your traditional rates. Depending on the property $ amount you may get a fixed loan or a balloon.
Hope this helps! Good Luck and wish you much success
This is an interesting topic for me, too, because I am starting a flip with a partner, but the structure of our deal is that I am going to be the owner and I am signing the note for the property.
I am wondering how this will work out at the end of the deal as far as returning investment funds and profit allocated. I obviously can't claim all the profit, but it would be there under my business and my accounts. We probably will form an LLC if we continue working together, but it's our first project and we're trying to keep it simple for now.
I know the short answer is, "talk to your accountant", and no doubt that I am planning to take my project spreadsheet to the accountant and say, "here's what I did, how do we handle this?", but I'm hoping to get some general idea about how that will work out just so I know what to expect before I get to that step.