Partnership with step-father (doctor), I'm a realtor and husband is a contractor.

16 Replies

Here's the scenario. I have some experience with real estate investing (1 foreclosed residential home purchased through a wholesaler in San Antonio, TX, full rehab, rented it for a year, sold it making a $26,000 cash profit). I've been a member of local REIA's, and took many courses in real estate investing ( I am familiar with creative financing, 1031 exchange, capital gains tax, 70% rule-of-thumb...how to find the good deals etc--- I'd like to learn as much as I can, unfortunately we do not have any active REIA's in mu area). Recently, I received my real estate license for a leg-up: access to MLS, Realtors Association and for networking purposes. My husband is a general contractor and can pretty much build a house from ground up with his crew. My step-dad is a doctor who has a pretty penny invested in stocks, mutual funds, IRA's etc. He pays A LOT of $ in taxes every year. He is more interested in being a passive RE investor and wants to use both mine and my husband's skills and expertise to start investing in Real Estate.

Questions I have:

1. I know how to find the deals, my husband can do the rehabs, and my step-dad funds the deals.  Any suggestions on how we can put these deals together so that it is a win-win for all involved?  I know that seeing a tax attorney and accountant is top-priority, but my concern is ensuring that my step-dad (who has little knowledge when it comes to real estate investing), understands what it means to be a passive investor and what he should expect as far as taxes go.  What can me and my husband expect for tax breaks?  If we're doing all the work

2. Any suggestions on what a fair deal would be?  Would him receiving interest on the deals be sufficient, or should he receive 50% of the profit, receive monthly cash flow?  I'm just so used to dealing with banks and hard money lenders (before I had my real estate license and before I was married to a licensed contractor) that I'm not sure what is fair.  I want to make Real Estate Investing my full-time career, and eventually want to get to a point where I don't need to use OPM, but also want to continue helping my step-dad with real estate investments.

3.  Any Advice?

Thanks!

The simplest structure would be to take a loan from your father in law. The loan will be safer for the lender if it is secured. Whether the loan is secured or not, the interest rate, and any other terms of the loan are up to the borrower and lender.

@Mallory W.  

You can partner up with your father in law as he is family. You and your step-dad can share the profit 50-50 after all expenses or whatever percentage you guys prefer.

You can buy each property in an individual LLC, so your assets will be protected and in spell out exactly how the partnership is going to go.

Good luck to you!

Lumi Ispas, Century 21 SGR | [email protected] | 773‑392‑2906 | IL Agent # 475.113981

Thank you, Lumi!

I was planning on forming an LLC. I have one in Texas and my husband has one here, in Alabama. I was taught that each foreclosed residential property should be purchased under individual LLC's. My question is... what is fair? I have read numerous articles stating that we can come up with how we think the partnership should go, but I'm not sure how to do that. I want what is fair for everyone involved. My step dad works crazy hours as a doctor and he wants a tax break, but at the same time I want to show him that he can retire investing in real estate and stop working as hard as he does. I also want to help my husband build up his company, and I want to basically manage every thing else. How will that help my step dad as far as a tax break is concerned?

I would ask your father-in-law on what and how he wanted, and how he wanted to structure everything. Then go from there. 

Medium mogul logo web smallPeter MacKercher, Mogul Realty | [email protected] | 314.210.4414 | http://stlmogul.com | MO Agent # 2010004223

@Mallory W.  

I know you want to help your Dad, but 50% of profits for the use of cash is the equivalent of a massive interest rate. You can get hard money all day long and take less of a hit on your profits. 

LLC's can be pierced, so if your dad has substantial assets he may incur less liability when acting merely as a lender rather than a partner in the LLC.

Regarding the tax implications, that's something you must seek from a competent tax advisor instead of investors who have no dog in the hunt.

Guy Gimenez, Buying Texas Today | [email protected] | (512) 270‑7279 | http://www.BuyingTexasToday.com

I would think in order for your step dad to get the tax benefits he wants you all should look at rehabbing an apartment complex or a ton of single family properties. 

You could have him fund the projects and then your husband rehabs them for your side of the deal. You could then figure out the split accordingly based off the value of work put into the project. Also then both would have ownership and both would get cash flow and tax benefits. 

You could have him be a Private Lender to you two for your projects. He could purchase his own RE privately. 

You have to be careful with friends and family in business. Be sure to have everything written out in a contract and also a buy/sell agreement in place. You always have to be ready to walk away from everything if it turns bad or be ready to lose your family. Another thing to keep in mind. What happens when a sibling sees how well everyone is doing and then gets jealous for not being involved. It can happen... Family businesses and deals are very tricky. 

Jeff,

I agree and understand what you're saying.  Because I am sort of a "newbie" and feel insecure taking a loan from family as opposed to a bank, I'm trying to figure out a way to make this deal great and fair for all involved.  Securing the loan from my step dad will be to draw up a contract with our attorney and a real estate tax accountant.  We can do that.

What do you think a fair deal would be?  I've heard of 50/50 split, however, my husband provides the expertise in doing all the rehab work and I find the deals, I will be a property manager by advertising, screening, and selling.  I'm trepadatious because it isn't my money, it's my family's money... 

Any advice would be great!  I consider myelf a "newbie" because I've only done 1 property and because I have only had one niche- 3/2/2, 70% rule, 80 day rehab and tenants in before it's rented. 

Thanks!

My two cents...Passive loss for a passive partner don't equal much tax deduction.  A

s far as how to share I would suggest looking at the same as you've been doing with other peoples money.  Unless your dad is contributing more than money than the equation should be the same as current with other folks.

Sorry if this didn't come across coherently, I'm taking meds for the flu...

Hey Mallory,

I just read an article in regards to LLC formations. You may find this interesting. Let me know if I can ever help. Bryan

www.linkedin.com/pulse/series-llc-banking-craig-lawrence-jr-

Bryan Miles, Chestnut Partners, LLC | [email protected] | 205‑240‑1052 | http://www.investbirmingham.com | AL Agent # 93877

Hi Mallory, sounds like you have the team in place and just need to solidify your strategy. I don't think anyone can really tell you what is fair, that's something for you guys to sit down and discuss thoroughly before getting into the first deal. Having said that, here are a few points I think you should consider:

1. What investment strategy do you plan on using? Buy, fix, and sell? Buy, fix, and hold? Buy, fix, hold, and refinance?

2. Depending on your strategy above, the tax implications can be vastly different.

In most cases, the profit from a fix and flip will be taxed at your regular income tax rate (if the flip happens in less than a year - short term capital gains).

With a buy and hold project you can get a much greater tax benefit due to depreciation write offs, amortization of capital expenses, loan interest deductions, and a much lower tax on the eventual gain when you sell (long term capital gains - typically 20% now).

With a buy, hold, and refinance you can take advantage of many of the long term tax benefits I stated above, but get a large amount (or all) of your capital back out of the project (tax free) at the time of the refinance. You can then keep the property, and use the cash from the refi to return initial investment to your investor and/or redeploy it into a new project. This is my preferred approach.

3. I'm not a tax expert, but your step father will most likely get the best tax benefits by being an equity partner in the project rather than being the lender (interest income is usually taxed at the standard income tax rate, and he would have none of the tax write offs explained above).

4. As mentioned above in another post, your step father will have less liability as the lender versus being an owner. What is his tolerance for risk?

The short version of my opinion is this: to keep it clean, simple, and lower risk for your step-father go with a loan secured by the properties you purchase. To provide maximum tax advantage to him, make him an equity partner.

Of course, whatever strategy you pick has to work for you. And remember you're offering your step-father an opportunity he probably would not easily have otherwise.

I'm not an attorney or tax expert so take my opinion as just that - an opinion. Good luck!

Thank you, Bryan for the article on series LLC's in Alabama and the change in laws. That was extremely helpful!

Chris-- THANK YOU SO SO MUCH for your help!  Extremely informative and now I feel like I have a better grasp on taxes and what I need to ask my accountant and attorney.  

Thank you a million times over to everyone!  Everyone provided me great information that google could not.  I am so happy that I have found biggerpockets.com.  THANK YOU!

Hi Mallory. I just closed a deal where my father in law was one of the partners. The most important thing is to COMMUNICATE up front what the expectations are and then solidify those expectations in writing. If you set up a joint LLC, the operating agreement is where this goes.

There's nothing out there that says equity has to be 50/50. My father in law wanted to contribute money, but didnt want to be bothered with any aspect of the deal, so he got less equity even though he contributed more money. Which was fine with him because he got a great return on his money and put zero effort into the deal.

At the end of the day, sit down together and hammer out a deal that makes sense for both of you because if either party does not feel the deal is fair and equitable, the partnership will collapse.

@Bryan Miles nice find on that article. I've had discussions about this new LLC with various attorneys and CPAs. Of course you will get different answers depending on which professional you are speaking with. One take away I have from all of my conversations is that this is so new to Alabama law we don't know how it will hold up in a court of law. I have decided to pass that along to anybody else to figure out and once it's defined and I like it, then I may further explore the series LLCs.

Medium bamainvest logo fa portraitJ Benoit, Bama Invest | [email protected] | 205‑982‑5647 | http://www.alabamaturnkeyproperties.com/

Originally posted by @Rodney Getsy :

My two cents...Passive loss for a passive partner don't equal much tax deduction.  A

s far as how to share I would suggest looking at the same as you've been doing with other peoples money.  Unless your dad is contributing more than money than the equation should be the same as current with other folks.

Sorry if this didn't come across coherently, I'm taking meds for the flu...

 I hope feel better Rodney!

@J Benoit and @Bryan Miles and all other Alabama investors:

I recently attended a workshop on the new Series LLC law in Alabama, put on by a local attorney and CPA. One major concern we as real estate investors had was whether there had to be a separate bank account for each series (i.e., separate account for each property).

Apparently you CAN in fact use the master LLC bank account for ALL properties, as long as your accounting is proper. See the below code section that is applicable.

To J's point about the law not being fully tested in the courts yet, I am still on the fence myself about this strategy. You can always identify a pioneer by the arrows in their back. This will be an interesting development to follow, however.

Section 10A-5A-11.03 states:

(a) Assets of a series may be held directly or indirectly, including being held in the name of the series or in the name of the limited liability company.
(b) If the records of a series are maintained in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets, or by any other method in which the identity of the assets can be objectively determined, the records are considered to satisfy the requirements of Section 10A-5A-11.02(b)(1).

Talk to him. That is going to be the easiest way to see what he would want out of the deal. Instead of jumping in with expectations of what he MIGHT want, ask him what he would want.

He isn't a professional investor, so he expectations will not be the same as a seasoned Private real estate lender or a HM lender. 

If it is anything less than a straight 50/50 split, then you have a better deal that you would normally have with a partner.

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