Starting an LLC with a Friend to Invest Into Rentals?

6 Replies

Come tax returns I should have around $5-7k, I have a friend who has been saving as well. We've talked on multiple occasions about rental properties. The idea of the LLC would be so we have equal ownership of the LLCs assets, and we would invest equal amounts into down payments, inspections, renovations, property managers, and so forth. We would have an LLC bank account, which is where all profits would stack up after monthly rent and expenses are taken care of. We would let the profits stack and use the earnings to invest into more buy and holds. If it comes down to it, and we need to pay ourselves, our payments to ourselves would also always be equal amount as well, correct?

Has anyone done this, or have any information/experience with this? The idea of the LLC is to protect both mine and his investments, while growing the LLCs net worth, monthly income, and credit to reach for larger opportunities. Does this sound safe for the both of us? 

Start an LLC with equal ownership, each put in 10% or so on a down payment for the first property. All expenses/income would be managed in the LLC bank account, all lines of credit would be under the LLC, and so forth. Is this safe? Would he or I be able to just click a button and wipe the LLCs bank accounts dry, or no? We are both very serious about wanting to do this, but we want it to be secure for the both of us. I am really looking for good advice on this! Thanks BiggerPockets!

safe, yes if done correctly... problem is, with no history and no personal garuntee, no money!

I just did this. Formed a partnership with a friend and created an llc we also got a tax Id to simplify it. Just make sure your partner ship has everything you need in it including what happens if one partner dies etc.

@Emzie Blankenship

I'm not an attorney or a CPA and I would read a lot and speak with others who have gone through this before you move forward.  Spend a little money and get with a professional who you trust that can provide advice specific to your situation.

Most lenders, at least in the portfolio lending realm that I travel in, require personal guarantees from all members of the LLC and the loans are full recourse. Additionally, the credit will be the member's personal credit because the LLC will have none. Here's your free tip of the day: If you have one member that has better credit than the other, you're better off structuring the partnership where the one with the bad credit has a below 20% interest in the company so they aren't factored into the lender's decisions.

In Virginia, you'll register with the state corporation commission and provide the lender with the letter from the IRS they provided when you received your EIN number, your operating agreement (hopefully that has your member list and percentage of ownership), your articles of incorporation and a certificate of good standing.  

Best of luck

Stephanie

This is a great little article @Emzie Blankenship . Just answered a few of my questions. @Stephanie Potter , is there any kind of advice you could give on how to approach having two other partners with possibly different levels of financial input? How would you structure an LLC around that? Would you put weight to knowledge or availability to grow business? Are there other factors you would have in mind that would change possible ownership? Thank you for your time!

Originally posted by @Christian Drake :

This is a great little article @Emzie Blankenship . Just answered a few of my questions. @Stephanie Potter, is there any kind of advice you could give on how to approach having two other partners with possibly different levels of financial input? How would you structure an LLC around that? Would you put weight to knowledge or availability to grow business? Are there other factors you would have in mind that would change possible ownership? Thank you for your time!

 Christian,

I don't know if I really qualify to give that kind of advice.  

From a lender's perspective, if one person has less than 20% interest in an LLC, we typically don't care about their credit or income because they don't have much say in the overall day to day operations. Having said that, you could have a partnership with someone that has a tremendous amount of knowledge about renovations, how they work and the time to do it, but they don't bring a lot of cash to the table with someone that has cash, but no time to make it work for them. If the guy with no cash has busted up credit and would kill the deal, make him/her a

Hope that helps

Stephanie

Originally posted by @Michael Lewis :

I just did this. Formed a partnership with a friend and created an llc we also got a tax Id to simplify it. Just make sure your partner ship has everything you need in it including what happens if one partner dies etc.

Michael - Would you be willing to share your operating agreement? I've formed an entity with two partners and we are hammering out ours using some online templates/examples. Would be interested to see a working document from a recently formed LLC that is looking to do exactly what we are.

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