Why New Jersey?
@Lorenzo Piccini one umbrella wont protect each of you, it will protect one of you. My insurance brokerage is licensed in all 50 states and work with a lot of investors. When working with partners, like yourselves, each of you would need an umbrella policy to be adequately protected.
i also recently partnered with two other investors. We have chosen to form an LLC for the three of us. It seemed the best way to go to write up the contract to protect all of our interests. If you don't go LLC, what will you do? It's imperative you have a written business contract. The first liability is making sure all partners agree. It doesn't matter if you're life long friends or related, write up a contract that all agree to. We have done this prior to finding any properties to buy. And I also consulted with a CPA.
@Jennifer Petrillo we are based in NYC and we have been looking for properties in Brooklyn and New Jersey. I recently moved to California due to my job and I may come back to the East Coast soon - I will actually take this advantage to study the Cali market as well but we are focusing as for now on NJ.
@Matt Moylan thanks for your replying and preliminary feedback, we will look into it.
@Anthony Wick thanks for sharing it. That's basically one of our question; what we could do without opening an LLC and how to protect each of us. We will definitely contact a CPA to write down the agreement. And as @Carol Birnberg wrote, what would be the things we would need to take in serious consideration - e.g. what will happen if one of us will leave...?
You need to execute a Partnership Agreement with your partners. And then create an entity, such as an LLC, to purchase and hold ownership of the property.
I'm no attorney, but some of things I'm doing in my LLC with partners...
- The LLC docs govern how decisions are made, but not the actually decisions.
- A management agreement will be used to cover the decisions made.
- Management agreement will cover how it's decided which properties to buy, cost, maintenance, expenses, establishing a reserve account before partners can take a profit, etc. Anything you can think of from costs to search for a property to an exit strategy. A to Z, all in writing. The partners can't argue (or it will be harder) if it's all in writing and filed with the state.
- We will have a buy/sell agreement that governs when a partner can leave, and how that will be covered. i.e. Can the other partners have a right of first refusal on buying out partner? You don't want a stranger just buying into the partnership.
I didn't even attempt any of this on my own. And, my document is still being drawn up by my attorney. I asked my banker to recommend both an attorney and a CPA that the bank trusts and deals with all the time. I am new to this LLC and partnership, but the attorney and CPA are not. That's the important part.
I own other rental property as well, but that is in my name and not an LLC. My liability insurance will cover enough of that. And, upon the advice of my CPA, we will not be forming an LLC for each and every property purchased. For at least the first few in the partnership, the one LLC will work just fine. Then, if we acquire say, more than 5 or so, then the liability (and assets) will be sufficient enough to possibly have more than one LLC.
Again, I would not do this without an Attorney or CPA. The money they will both save me, and the liability coverage, will far outweigh what I am paying them.