Buying Property with a Partner
Scranton, PA · Member since 2017 · 7 posts · 2 votes
Hello,
Due to the fact of being a bartender for the last several years, and having student loans, my debt to income ratio is quite screwed up, making it near impossible to get a mortgage. For this reason, I'm buying a property with a partner, but we're putting the financing in his name. The property (duplex) is rented, and we're opening a joint bank account once we close. We'll be splitting all the costs and have the rent and bills coming from this joint account. Then we're starting an LLC and moving the house under the company, and save up over a year for the next one. My question is do you think this is a smart idea, and if something goes wrong, will I have any recourse to get my money out of it?
Thanks!
@Jarod Ciehoski I would form the LLC partnership first, so that there is a clear, legal, path to move forward. At the very least I would get the partnership parameters in writing before committing anything financially.
Thanks for the reply!
We have it all documented on the amounts we're each putting in going forward. The lenders needed the LLC in place for a minimum of 2 years before they would allow a property to be purchased under it. Kind of stuck there. :(
Thanks for the reply!
We have it all documented on the amounts we're each putting in going forward. The lenders needed the LLC in place for a minimum of 2 years before they would allow a property to be purchased under it. Kind of stuck there. :(
A couple things I would mention for this. First, I would always encourage anyone planning for a partnership to work through the questions in this article. It sounds like you have already held these types of conversations, but many people skip this step and pay for it later.
Second is how you actually move the property. I will give you a more expensive and a less expensive strategy just to give you an idea of how these things get built out. Ideally you would have insurance to help out, and then the LLC just functions as a "backup" in case things go really wrong or insurance doesn't cover something to keep it from ruining your life. There might be issues transferring the property into the LLC depending on the loan you secure, so you might want to talk to the lender about the Due-on-Sale Clause to make sure they don't call their note if you transfer the property into the LLC after purchase. The second strategy would be the workaround to the DOS Clause.
Strategy 1: Buy the property and place it in the LLC with the operating agreement that is detailed about how you guys operate the duplex.
Strategy 2: Create LLC > nest LLC into an Agent Trust > purchase house > nest house in land trust > assign the LLC as the beneficiary of the land trust with yourselves as the trustees (managers, essentially.)
This is obviously pretty complex. The reason you would introduce the trusts is that you can have your attorney sign as the "nominee trustee" on public record for these entities, then after formation have yourselves become the "trustees" per the wording of the land trust. You will still own the property, but the attorney's name (which has attorney-client privilege) is on the record. That means people can't see that you own the property, and if they want to find out they need to pay a significant in discovery and have good reason to find out. The issue with Strategy 1 is that anyone can see what you own and file against you - Strategy 2 requires they throw money in right away, which deters a lot of cases.
Asset protection can just keep escalating more and more. The main thing you want to do is invest in a way that makes yourself and your partner comfortable and keeps you both protected. For a single investment some good insurance and an LLC are a good start. But for some who are risking quite a bit personally, sometimes it helps to show them there are additional steps you can take to limit your visibility and deter lawsuits.