Purchasing property with friends for personal use and rental

17 Replies

Hi everyone,

First time poster here. I work as an attorney (in a field unrelated to real estate, unfortunately) and plan to purchase property in the coming months with two long-time friends, one who manages his parents' residential and commercial properties and the other who works in the IT space. Specifically, we plan to buy property in a secluded area (e.g., near Shenandoah National Park or in WV near the VA/MD border) that would serve two purposes: (1) a peaceful retreat from city life, and (2) a rental property for short-term stays/experiences (e.g., something we could list on Airbnb).

One takeaway from searching these forums is that we should, from the outset, have a detailed agreement in place to spell out the rights and responsibilities for everyone, such as decision-making authority, managing membership/ownership interests, etc. This makes sense. Aside from this, one thing I am unsure of is to what extent it would be beneficial to establish a corporate structure from the outset. For example, does it make sense to create a partnership or LLC, or is it sufficient to own the property as tenants-in-common and execute a joint venture agreement that governs our operations? Any thoughts or resources that folks can share on this question would be much appreciated.

We are looking at properties in the $200 ~ $250K range and plan to take out a mortgage with about 30 to 40% down, so that we leave sufficient cash for renovations and other expenses. One complicating factor is that we all plan to contribute different percentages of the down payment; we are thinking through how to account for that in the agreement (for example, the person contributing the least upfront may take on a greater share of the mortgage payments for a period of time, etc.).

Bump. Also wanted to see if anyone had recommendations for small firm/solo real-estate attorneys in Virginia that could advise on the underlying agreement(s). Thanks.

I don't know if a bank would lend to an LLC that had been newly formed. I have heard that the rule of thumb is two years of finances that they can evaluate.

One option is that you can purchase the property and lease the property to your LLC so the LLC has "rent" as an expense and AirBNB income as revenue. As far as liability goes, you can get an umbrella policy for that.

Since you're dealing with friends and this is not 100% business you have to consider fairness but also dignity. If it were me, I'd still do an equal split then just treat anything contributed over the minimum as a loan to the business. (This is one of those things that sound simple in my head but complicated as I type).

for example Bert contributes 30,000 Earnie contributes 40,000 and Big Bird contributes 10,000. The partnership will be structured as if each partner paid $10,000 to buy into the partnership. So Big Bird owes nothing and is not a lesser partner. The business liabilities, however, include the mortgage debt plus a $20,000 a debt to Bert, and a $30,000 debt to Earnie. Big Bird still gets his profit each month, and his check is the same as Everyone else's. Bert and Earnie get that same check PLUS a loan payment. Every time a loan is paid off everybody's profit check gets bigger.

$$BEST$$




I'd start with whoever is supervising the legal clinic at UVA (assuming they have a real estate law clinic). If they can't do they work they can surely give you a good referral. Professors always seem to have connections ;)

Thanks Ebony. These are very helpful thoughts. I like the concept behind the structure you suggested, especially after we start generating income. Under your framework, would each LLC member also contribute equally to the monthly mortgage (in addition to having an equal 1/3 equity stake), despite the varying initial contribution amounts?

"I don't know if a bank would lend to an LLC that had been newly formed."

Sure they do, happens all the time. The LLC is not taking the loan, the members of the LLC are and have the obligations. The buyers need to qualify for financing as members of the LLC. NOT A LAWYER and I''m in OR, so check with your lender there

On the personal use side, get with your CPA, you have a limited amount of days/year you can personally use it if you want it to qual as rental property and get the better tax treatment.

"On the personal use side, get with your CPA, you have a limited amount of days/year you can personally use it if you want it to qual as rental property and get the better tax treatment."

Thanks for this thought, Steve. I had not considered this before.

@Matt M. Thanks. To clarify, is it your opinion that the general idea of partnering with friends is a terrible idea, or is there something problematic about the arrangement I've described here? If the latter, do you mind elaborating on why you believe this arrangement is a terrible idea? I figured that, so long as we carefully structure the partnership and manage everyone's expectations (i.e., make sure we are on the same page), things should work out. But it would be great to know if I'm missing something.

@Christopher S.

Sure, 1st off I have a big problem with partnering. I’ve seen to many go sour, and I most definitely would not want to lose my friends over a house. 
I think everything would have to be split in 3rds evenly if you were to do it. And hire out for whatever needs to be done. This way at the end of the day, when you guys sell, there’s no argument about who gets what. Everything remains equal. 



"One option is that you can purchase the property and lease the property to your LLC so the LLC has "rent" as an expense and AirBNB income as revenue."

I'm not an atty, but have absolutely no clue why you'd to it this way instead of structuring the operating agreement to split income, expenses and taxes.

Seems too clever for its own good.


"

1st off I have a big problem with partnering. I’ve seen to many go sour"

Seen plenty of partnerships do just fine.  However, you need to structure it up front to make sure everyone in ownership entity understands and agrees to:

1) Pro-rates on income and expenses and capital calls and tax benefits if they happen.

2) Individual rights/responsibilities of each partner

3) Liquidation of interest - What happens if one partner wants out (or gets divorced and the ex-partner gets his share).

It can work very well, even if problems happen, but get an atty that does partnerships to draft it.

@steve Morris "have absolutely no clue why you'd to it this way instead of structuring the operating agreement to split income, expenses and taxes."

You're confused. The business would be structured to split income expenses and taxes. I'm not sure what made you think I was suggesting they shouldn't. You must have misunderstood something.



So in the beginning when you're not making money... Yes I think the mortgage payments should be equally split. But unless you're doing some extensive renovations, you should be able to have enough income to cover your first mortgage payment. You're in a tourist area plus AirBNB gives you an SEO boost for being a new listing. You will likely have $1000+ in bookings within your first week. Unless you're charging too little or your have a decor or photography issue.


The key is to not wait until closing to pick out furniture. Make a miticulous shopping list. Choose vendors who are always stocked and Dave fast inexpensive shipping. Price all of the furniture (I like to use Asana for this) so that as soon as you close you can order everything within an hour and you can paint and prep the place as you're waiting for it to be delivered. If you want to wait until you see the place to shop for it, that's fine as far as art, accessories, or anything you quickly grab at Target but for essential items that you can't book without, have a reliable plan.

I have one list of farmhouse style furniture and one list of MidCentury Modern furniture as that's what fits nicely in most homes in my area.

@Christopher S. My advice is not to do. The problem is that you want to use it for personal and AirBnB use. The problem becomes when one person wants to use the house during the busy time of the year. The other people will see it as lost revenue and more capital out of their pockets. Airbnb bookings can take place months in advance so it might be booked when you want a weekend getaway. One person might use it more than the other partners.

I’d avoid this situation and rent an Airbnb together when you want to get together.

My advice would be to keep your investments as purely investments and your lifestyle buys as purely lifestyle buys. If you're going to buy a property to be a short term rental, don't try to mix it with pleasure. As soon as you start looking at it from a personal use standpoint, your income is going to go down. I don't know much about the STR market in West Virginia, but 3 parties are an awful lot of cooks in the kitchen for a $250k property. I would invest the cash on something with more meat on the bone for you and then use the profits to buy a vacation home (or another investment) rather than doing it this way. This will be really tough to scale.

@Christopher S.

Sincerely i would treat as a business. If a member wants to use, book as any tenant. It will pay, of course, but after while will receive some back as an investor in the business.

That will avoid those over using it and killing the short term business you are building. Or if they over use it, they will pay as any other that rent the unit, and not affect the one interested in the business.

I have SFR in LLC and thought to be hard to get financing using the vehicle. Most asked to move to my name and later on put under LLC.

Finally, being a business will have “shares” to any partner and disclaimer of activities, operational agreement and will definitely avoid future disagreement.

Good luck