Buying 2 Properties at the Same Time with a Partner

19 Replies

Hello BP Family,

I need some financing insight on my current situation. I am an active duty military (already have a primary residence) and a junior REI who is looking for his first deal. Along the way I found 1 good deal and 1 potentially great deal.

Property 1:

Over under duplex. Asking price 125K with seller already agreed to pay for closing. Both units 1 bed and 1 bath with downstairs unit already have a tenant and top unit is vacant and can be turned to a 2 bed 1 bath. Both unit is in decent shape, at a good location, and will cash flows decent.

Property 2:

A foreclosed single family home with a free standing "in-law suite" next to the house, but realistically it is an over under duplex with 1 bed and bath per unit. asking price 180K with an offer we pay for all closing cost. Potential of subdividing the lot to make the in law suite a legitimate duplex. Offer pending.

So here is my current plan on financing these 2 properties. 

Property 1: Already pre approved with Lender A (mortgage broker) and plan to use the VA loan and put 10% down and live in the top unit assuming it passes the VA inspection.

Property 2: Already pre approved with Lender B (bank) to do conventional and put down 20% but i have to bring in my partner who is willing to transfer half of the down payment and closing to my account before closing and split cashflow 50/50.

My questions are how does the underwriter feels about seeing someone else transferring a large sum of money in my account? How does taking out 2 mortgage loans at the same time affect me? Do i have to disclosed to each institution about my plan?

Any feedback is much appreciated!

Thank you.

Bobby.

Full stop, no having two loans in process at the same time with different lenders. One, or more than likely both, will be denied. Not going to be able to hide A from B or B from A.

Also don't partner on mortgages unless it's with your spouse. 

Bobby, I agree with Chris on this one as well. Remember when you applied for the loans you didn't mention the others as a liability so essentially you will be committing or close to committing loan fraud. That's like going out and  buying two cars at the same time also the debt won't show up on your credit and you're hiding it from the bank. Also, ensure that your careful when splitting a mortgage because in most cases these are long term investments and when times get ruff,, your out of luck. I'm also active duty, If I were you I'd take more consideration in finding a duplex, triplex or quadplex and focus on that business model getting started. Good luck

@Bobby Njoo

I'll echo the same thing.  If you don't disclose both loans to both lenders, you are committing fraud.

That said, assuming that you disclose everything and are able to qualify for both loans, with Conventional financing for an investment property, you cannot get a gift (unlike a primary residence where you can).  You also cannot use a personal unsecured loan.  So the only way to use your partner's money is to also have them on the loan with you.

Hope that helps, best of luck, and TYFYS!

@Bobby Njoo

Go with one lender. Full disclosure to lender on plan. Go less than 10% on VA loan if you can. Free up cash. Form an LLC with partner on second property, with a buy/sell agreement in LLC. Have an attorney do LLC paperwork.

If that does not work, do VA residence loan first, then work into the second property with partner ASAP.

@Chris Mason

Thanks for the warning and the quick comment. I did make a full stop. Just wondering what are your reasons for not

Doing a partership on a mortgage unless With a spouse? I have a close friend who is financially stable, trustworthy, and have similar business model/approach. Just wondering what other factors i should consider.

@Zack Karp

Thanks for the confirmation! When having more than 1 person on the loan, assuming both borrower have good financial standings, how does that usually effect the loan itself? I mentioned to my lender about putting my partner on the loan and he mentioned we have to apply for a commercial loan instead. What i don't understand is that it was for a residential property...

@Anthony Wick

What is your thought on forming an llc with an attorney vs forming in your own? Also when applying a loan under an llc, would there be a higher interest rate on the loan?

Originally posted by @Bobby Njoo :

@Chris Mason

Thanks for the warning and the quick comment. I did make a full stop. Just wondering what are your reasons for not

Doing a partership on a mortgage unless With a spouse? I have a close friend who is financially stable, trustworthy, and have similar business model/approach. Just wondering what other factors i should consider.

 You're going to sign a note wherein you are wholly responsible for the entire mortgage payment. This is true even if you both sign the note... just like when you have three tenants sign a lease, ALL are responsible for ALL the rent, there's no "oh tenant B didn't pay their share so here's 2/3 of the rent."

Simultaneously you are going to file tax returns telling the IRS you only get 50% of the rent/profit. Fannie/Freddie are under federal conservatorship, so whatever you tell the IRS, you're also telling a mortgage underwriter. 

Those same tax returns will show you writing off 100% of expenses. In addition for being responsible for 100% of the mortgage. But you also just told the underwriter you only get 50% of the profit when you did your taxes.

Boom, that's the sound of your DTI blowing up the next time you apply for a mortgage. (Unless you are a baller and make $400k/yr or something, in which case it will not matter)

@Chris Mason

You know thats funny because i was just thinking about how to do my taxes in the future (like who will claim what and etc) but i never thought connecting it to the DTI aspect. Thank you so much Chris! I'm not sure if you have used some type of partnership in your deals, but, in your opinion, what would be a good agreement for a partnership?

Originally posted by @Bobby Njoo :

@Chris Mason

You know thats funny because i was just thinking about how to do my taxes in the future (like who will claim what and etc) but i never thought connecting it to the DTI aspect. Thank you so much Chris! I'm not sure if you have used some type of partnership in your deals, but, in your opinion, what would be a good agreement for a partnership?

 Because of what I do the question of "will this screw with me getting a mortgage in the future?" is always on my mind.

With that focus/bias, the only type of partnership I'll endorse is being each other's capital partner. Secured borrowed funds can be used for down payments, people do it all the time with HELOCs. 

So if I have the deal and you have the capital, I'll invite you to be my private lender for the down payment, and get a normal mortgage from a local investor friendly LO for the other 75% or 80% of sales price. Work out rate/terms, you lend me the money, and we secure that obligation by some OTHER property I own as a 2nd (or 3rd, etc) mortgage. 

So I've got my 0% down investment property, the golden calf. You've got your ROI in the form of the agreed upon interest rate and fees for the money you lent me. I'm the deal partner, you're the capital partner, we both brought value, we both win.

Neither of us are automatically screwed when we apply for a mortgage in the future (DTI hit for the private mortgage will pale in comparison to the DTI impact of the "50% of profits, 100% of expenses" situation described above).

Capital is the most common motive to partner. Being motivated by feely feels to partner, like "oh we're buddies and we wanted to partner for that reason"? Bad idea. Everyone needs to be bringing something different to the table for it to make sense, otherwise why partner? 

@Bobby Njoo

You should have a clear list of responsibilities and what the next step is if they do not complete them. Things get rocky quick.

@Chris Mason

Ah i see. Well i was blind but now i see. Thank you so much Chris. I have to reevaluate my situation definately.

@Ryan Potter

Yes we were planning on drafting up some kind of operating agreement. But there are allot of situation that needs to be covered. Now I understand whysome people prefer passive investor

@Bobby Njoo As I formed my LLC with two unrelated partners, I hired an attorney to do all the work. It did cost me $700. But, like hiring a CPA, I feel it is well worth the money. I have loans in both my name only and in the LLC. The LLC loans are commercial, so they do come with a higher interest rate, shorter amortization time, and a balloon payment at 7 years. Again, just a cost of doing business. I calculate that into the offer I make on properties. I've chosen to leave the personal loans in my name and not move them into an LLC, as I did want to trigger any due on sale clause.

@Bobby Njoo I may be a little late to the party here but I had two loans go at once and both were approved. One was a residential loan using my wife's VA loan (our quad that we are house hacking) and the other was a commercial loan with two other partners. I just drew up terms and formed an LLC for the partnership, got a lawyer to gather and sign the paperwork and voila--we were a formed partnership and purchased the triplex with the commercial loan. It took some time to negotiate the terms and I can give you some tips if you want to DM me.

Also, understand that with a residential loan, your bank may require that you have proof of the funds in your name (as in your account) for up two months prior to closing. So having a partner move the money over, unless they are your spouse, would not be allowed. That way I got around that was using a commercial loan from a local credit union. Again I can give you a recommendation for a local bank that can give you a competitive rate and terms.

@Anthony Wick

I see. Yes i figured that would be the legitimate way of having a property under an llc. For the property that you have under your name, just wondering what do you use for liability protection? Do you think landlord insurance is sufficient or one should get an umbrella insurance as well?

@Anthony Pinto

Thanks for the info! Yes one of my lender mentioned a seasoning period of all funds that goes into my account from an account that is not under my name. Definately will send you a DM. Thanks!

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