We live in California, but my wife is from Hawaii. Her good friend, who still lives there, just asked for our help. They own multiple businesses and make close to half a mil annually, however due to their accountants creativity, they're taxable income is much less. To the point to where they are not able to qualify for financing on their own. They've asked for our help to purchase a property, there in Hawaii, where we would obtain the financing and they would pay the mortgage.
If we were to seriously consider this, what would be the best route to take? Partnership?
I'm afraid that my wife and I would not qualify for the new loan on our own since we are close to being maxed out. However, with their down payment funds, maybe it could work?
The seller's of this property will not carry-back. They've already asked.
Any suggestions would be great!
@Ben Cochran Hey Ben, shout out to the 209! I grew up in Lodi and my wife is from Stockton ;)
Your wife and her friend must be REALLY close if she is willing to be the primary lien holder, even if it is just on paper. If you were to secure financing for her that would also seriously hamper your future real estate goals. If you are ok with all that, the next step would be to talk to a loan officer/lender to see exactly what you and your wife could qualify for.
The other issue is that it would not be owner-occupant financing since you and your wife are still on the Mainland I'm guessing. Therefore, down payment and income requirements would be higher. If you were to all go in together then you may consider forming an LLC or partnership to hold title while having your names on the lien.
If you have more questions feel free to message me directly. Good luck!
@Ben Cochran What if they don't pay? I know........ but what if they don't? This is a very real possibility. I don't buy the "creative accountant" story unless they are committing tax fraud. If they will cheat the IRS, will they cheat you? If they go to jail for tax fraud, they will not pay the mortgage. I would tell them that you are broke and you can't qualify for the loan. Sorry.
I have to agree with Anthony Dooley, the risks here do not seem to outweigh the rewards.
Hi @Ben Cochran
I agree with cautions provided above. Assuming these are addressed, here are some logistical items to consider.
Your friend's dilemma is fairly common for a business owner. Be aggressive on your tax returns to limit your tax liability or be conservative on your taxes to allow easier qualification for lending? Is the $500k pre or post tax? If post tax, that's a sufficient amount of money no matter how creative their taxes are. I'm surprised they can't qualify. Unless they don't have two years of verified income yet.
Is this how the overall deal would look?
Downpayment - them
Loan - you
Mortgage payment - them
For this type of set up, you'll both have to be on the mortgage. Them because of their down payment, you because of your income. Most likely title will have to be held as Joint Tenants (most mortgages won't allow tenants in common in this situation). So ownership will be in equal percentages.
If it is a residential property, you most likely will not be able to get financing in the name of a partnership or LLC. It will have to be in your personal names. So setting up an entity will definitely help in protecting everyone, but will make it hard for getting financing. If it is a commercial property, then an entity will work and is definitely recommended.
As for the concern of you not qualifying, there's only one way to find out. Going through the prequalification process will also open the conversation with the lender as to what creative options you have.
Some things to consider (although you probably already have):
Who will select and vet the property in determining if it's a good investment (local expertise will be critical)?
Who will manage the property/project?
How will cash flow be distributed (assuming it's a rental and not a flip)?
How will the eventual sale be decided on (i.e. timing, price, etc.)?
All the best!
@Ben Cochran I see it done all the time. I have a couple Jv agreement contracts that outline the agreement. There is a risk but can be mitigated by covering it in the agreement between partners.
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