Chicago 203K Partnership?

8 Replies

Hello BP Community

Looking for a little bit of guidance here...

I have been spending quite a bit of my free time learning about the benefits of REI and decided recently that I will be pursuing a buy + hold strategy to build some long term wealth. While my current financial situation is improving, I do not currently have the ability to jump on a deal should I find one.

After explaining my plan to a close friend who also lives in the Chicagoland area, he told me he is interested as well and has up to $40K to invest. We both currently rent (separately) and are looking in the direction of doing an FHA 203K on a 4-plex and renting out 2-3 units.

Any advice on how to structure the partnership and/or better ways to invest the $40K? I told him he might be better off pursuing this on his own as he would have all the skin in the game initially but he insists on me helping him and holding him accountable. Right now we're leaning towards putting everything in his name and I would live low rent/rent free until we could pursue a 2nd investment. Assuming we find the right deal, it seems like this strategy would increase our combined cashflow the greatest.

Thanks in advance.

RH

@Ryan Heldt

 Just curious - What areas are you looking for a 4-flat?  You are in my area and I'm not aware of many of them around here, so I was just wondering if you are finding some.

@Mark Doyle

We are looking for C+, B neighborhoods on the north side of Chicago and west suburbs north of 55. Within 1/2 hr of Elmhurst where we work ideally.

I've only recently started looking on realtor.com and have found a couple, but plan on talking to a real estate agent and networking on here to find the right people. What resources have you been using to search?

RH

@Ryan Heldt I'm not really in the market for a 4 flat.  I just thought maybe you were looking in the New Lenox/Frankfort/Mokena/Orland Park area, and I was commenting I wasn't aware of many around here.  It makes more sense if you are looking up that way.

Originally posted by @Ryan Heldt :

Hello BP Community

Looking for a little bit of guidance here...

We both currently rent (separately) and are looking in the direction of doing an FHA 203K on a 4-plex and renting out 2-3 units.

Right now we're leaning towards putting everything in his name and I would live low rent/rent free until we could pursue a 2nd investment. 

I believe the applicant for a 203K loan must be an owner occupant.  If I'm right then he must occupy the property.  

If the only way your partnership works is for you to occupy the property then I'd check w/ the 203K lenders to see if they would allow using your partner's cash for downpayment.  The lender would consider that a gift from your friend, independent of whatever type of agreement you come up w/.  

@Mark Doyle

You're right. I looked locally and didn't see much except for over in Joliet. Might check out Lemont area though.

@Crystal Smith

He does intend to occupy the property. I would either live with him or in a separate unit depending on the property. I have a longtime girlfriend and dog that would relocate with us.

@Ryan Heldt now that we have who will live in the property out of the way, your main question was "Any advice on how to structure the partnership and/or better ways to invest the $40K?"

A potential way to structure a formal partnership is to establish an LLC with each of you as members. The LLC would have an an operating agreement that lays out the responsibilities of each member, along with the capital contribution. The challenge w/ this approach, if you're going to buy & hold, is your LLC will not be able to borrow any money. One or both of you will have to apply for loans individually or jointly. Rule of thumb: Your LLC will have to be in business for a minimum of 2 years before it can even be considered to borrow any $.

Another potential option for your partnership & leveraging the $40K is to establish the LLC; find a property that only needs lipstick (paint, carpet....) fix it up & sell it. Private & Hard Money Lenders will lend to an LLC. The $40K would be used to cover payments & closing costs & whatever gap isn't covered by the short term loan. Build up your capital over a couple of years from flipping properties then start holding.

@Crystal Smith

Thanks for the insight. We will definitely take it into consideration.

Do you foresee any issues with doing the 203K 4-plex for a year while renting out 2/3 units, then refinancing after 1 year to pursue a 2nd 203K 4-plex and renting out all 4 units of the original 4-plex? Kind of a rinse and repeat...

Originally posted by @Ryan Heldt :

@Crystal Smith

Thanks for the insight. We will definitely take it into consideration.

Do you foresee any issues with doing the 203K 4-plex for a year while renting out 2/3 units, then refinancing after 1 year to pursue a 2nd 203K 4-plex and renting out all 4 units of the original 4-plex? Kind of a rinse and repeat...

 I don't see a problem w/ it.

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