Partnering up with a friend

9 Replies

A friend of mine and I have recently discovered that we both are interested in rental properties and we both think it would be a good idea to partner our resources together in order to get things going for both of us. We are looking at multi family properties in Philadelphia but I’m no sure what hoops, if any, that we have to jump through in order to legally start our partnership. We plan on growing the business as well and buying many properties in the long run. Do we have to apply for the mortgage together? I’d rather just keep one persons name on the mortgage so that we don’t run into the issue of having 4+ properties in our names to early and can maximize how many conventional mortgages we can obtain. Is there a way that we can have a legal partnership with just one of us on the mortgage? Also do we have to file to become an Llc? If you need any other information feel free to ask! Ive done extensive research on the real estate side of all of this but not the legal side with partnerships and I’m not even sure where to start Thanks in advance for any help!

You should get everything in writing with an official partnership or LLC. Nobody expects business ventures to fail but if they do it will be about the money and it will get ugly. Better to have everything spelled out ahead of time when you are both optimistic and friendly in a nice, fair agreement.

The LLC is a good idea for several reasons, liability for both of you and you can bring in other members later if needed as per the bylaws of your LLC.

@Kevin Means

What state are you in? While there are obvious similarities, there are meaningful differences in state law when it comes to LLCs and partnerships.

And yes, I believe all 50 states require you to file documents with the state to form an LLC. The exact process depends on the state.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

The partner must bring in money or be of great benefit to the partnership in some way . He has to bring something or you’ll be doing all the work and/ or putting up the cash yourself and despise him eventually. Many good friendships have been destroyed going into business . Be mindful of that first

@Kevin Means i am heavily vested in Pa but the western end of the state in Pittsburgh. Slow it down. Build your team. You need a good attorney and a good CPA to advise you how and what to set up before you start. You will cost yourself more harm than good by not setting up everything correctly in advance. The advice on the forum is great dont get me wrong but you need to surround yourself with some great team members and the first two key members are the above I mentioned. 

@Kevin Means

I don't want to get technical but the term "partnership" has a specific meaning under the law. Typically, the term means a General Partnership. In Pennsylvania, you can form a General Partnership without filing anything with the state. That said, I wouldn't recommend it. A Limited Liability Company is different than a General Partnership. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Re "apply for the mortgage together": as a beginner, you are confusing terminology a bit here, so let's break it down into the various parts.

People apply for a "loan secured by real estate", and refer to that as "applying for a mortgage", but that is not following the strictest definitions of the terms.

A "loan secured by real estate" consists of two components: a promissory note, and a security instrument that pledges the real estate as collateral to secure the loan. A mortgage in the strictest sense of that word is just the latter of these - a security instrument that pledges the real estate as collateral for the loan. And another misconception - people commonly think that lenders give mortgages, when in reality lenders give the loan to the borrower and the borrowers (actually owners of the real estate) give the mortgage to the lender; yes, that is how the terms are really defined.

So let's consider a pertinent example. A couple of years ago I sold a house to a married couple, but their intent was for only the man to be named on the loan. So their agent wrote up an addendum to the basic agreement stating that only the man will be signing the mortgage; I refused to sign that! Agent asked why, I said all owners have to sign the mortgage, the lender won't give a loan if only one of the co-owners signs the mortgage. So agent calls lender, and of course I am right (no surprise to me), and then they do an addendum where only the man signs the loan application, but both of the couple sign the mortgage. The lender had no problem with this, and I did agree to sign an addendum worded more like that.

This example is similar to what @Kevin Means seems to be seeking; only one of the co-owners will sign the loan application, but both will have to sign the mortgage, to give the lender a proper mortgage.

As @Chris K. was alluding to, there are different kinds of arrangements to "partner". They can be a joint venture, there can be a general partnership, there can be a limited partnership, there can be an LLC, and some others. This is the sort of thing where both partners should sit down together with an attorney and CPA together, spelling out what they wish to accomplish, and let the pros give pluses and minuses to each possible approach so the partners can make an informed decision. The plan to borrow is something to also include in the discussions.

@Kevin Means , I was in the same exact situation as you! I reconnected w/ a friend whom I came across on BP and we had similar goals, so we decided to partner up to scale faster and get a bigger deal together. We formed an LLC and purchased a multi-family property through the LLC. The LLC is on the title, loan docs, tenant contracts, etc. This provides us asset protection since we don't individually have our names on any of the documents and own the property through the LLC. I hope this helps!

Originally posted by @Sherwin Gonzales :

@Kevin Means , I was in the same exact situation as you! I reconnected w/ a friend whom I came across on BP and we had similar goals, so we decided to partner up to scale faster and get a bigger deal together. We formed an LLC and purchased a multi-family property through the LLC. The LLC is on the title, loan docs, tenant contracts, etc. This provides us asset protection since we don't individually have our names on any of the documents and own the property through the LLC. I hope this helps!

I am still learning about thit stuff. A question . How does the bank figuring out if your LLC is worth landing money to? You said you don't have your personal names on any of the documents. Who are they going after if your LLC stops paying mortgage ?