First investment purchase - parternship question

3 Replies

Hello, hoping someone can give me some simple guidance / advice on how to approach our situation.

I've done my fair share of googling and there's so much info,  it's hard to really sort it and make sense of each scenario. I'm sure someone here can provide all of the info I'd need in a few sentences!

I'm looking to do my first deal. Either flip or rental, am open to both ideas. Have put a few offers in but no luck yet..but want to start getting more aggressive and want to make sure i am fully prepared once it does happen. I have someone to partner in either of these efforts. We are both in the same boat financially and with what we can bring to the table as far as time, management skills, repair knowledge, etc.  so this would be a 50/50 split of both costs,  work, etc

Not sure that it matters but we both have access to enough cash to pay cash for the right deal, or access to heloc, 401k loans, credit cards, etc...  depending on deal it may be a buy cash now, do delayed financing after, or if its a flip just do all cash.. not sure that any of it matters but just throwing out all the info i can. Also, probably important, both have excellent credit scores and credit history.

My question is about the partnership and how to structure it. If our first purchase is a rental that we intend to hold, and should we decide to say do the delayed financing for this example...

Some ideas I had - do we do an LLC or scorp, put the house in the 'business' name then? Or do we both apply for mortgage in both our names because we both have great credit - or would that be dumb due to the 10 house per person limit with mortgages and it may count as 1 for each of us? Do maybe 1 of us do the loan, but title it to both people? Or do we just leave 1 person out of it on the books.. not sure how that works come tax time when we both want to get some deductions....

Looking for the best overall scenario as far as cost effective, tax benefits, keeping accountant happy, etc and of course w/ the llc there is the liability protection.

Any info would be appreciated, sorry this got so wordy!!!! 

@Stacy C.

First and foremost - it is usually not advised to put a rental property within a Corp(S-Corp included).
You may want to put a fix and flip within an S-Corp to potentially save on payroll taxes. However, please be mindful that an S-corp does include extra costs(payroll tax, formation costs etc).

One of the benefits of an entity like an LLC or S-corp is that is provides limited liability. However, you must treat it like a business to be afforded the limited liability(no commingling of funds/activity. Title/mortgages are in the entities name, bank account in entity name and rent checks to entity).

With that said - You and your friend who look for a lender to who will lend do you. As you mentioned - if you are both on the loan - this will count as 1 out of 10 loans per Fannie Mae / Freddie Mac limitations. 
However, if you get a portfolio loan in the name of the entity- this won't count towards your 10 limitation.

You both should sit down with an attorney to draft up your operating agreement before you start.

You can do this today online. Register an LLC ($99) with the Ohio SOS.

SOS Forms

When asked about employees, NO NO NO.  that will trigger all kinds of other departments and taxing authorities.  Open a business checking account at your local bank, even better at the bank you expect to get the loan from. 

That's the easy part

Most important part, as @Basit Siddiqi advised.  There are a lot of examples online for partner arrangements for you to research. You can get as detailed as you like. Remember, it is only as good as the friendship or professional relationship you share with your partner but it can help tremendously if there is a sudden unexpected event; death, loss of job, divorce, etc.

Getting a mortgage in the name of a new LLC would require that llc to have already established some credit though, correct? I assume it would not be easy for a brand new llc to get a mortgage?

One can purchase it and transfer to LLC later on, right? Or is that not a great way to go about it due to the costs of transferring?

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