How to Partner on an SFR or Small Multifamily

2 Replies

All, 

I'm looking into purchasing my second investment property an have considered bringing in a partner. He is a family member who is not experienced but can really help my capital to invest. How do you structure a deal to benefit both partners? Do both people just sign the purchase agreement? Do both people need mortgages?

I want to hear from anyone that has experience in doing this. 

Thank you, 

You can sign the purchase agreement together, or just one of you can sign, so long as the contract incorporates the right for you to assign it to yourself and another investor(s), or some LLC or other entity prior to closing, and without the requirement of the Seller consenting to such an assignment. (Speak with your attorney before signing anything.)

Typically there can only be one mortgage on the property. Your lender needs to know that they have the priority to foreclose over any other lien holder (i.e., a second mortgage holder). if you have two mortgages, then one will have to have priority over the other. The 2nd position mortgage will cost more.

Essentially, your joint venture ("JV") Partner will likely need to qualify as a co-borrower and co-guarantor (if you are buying the property in your own names and will have your individual names on the deed). If you're buying the property under an LLC or other corporate entity then you will potentially have the ability to be the Managing Member, and your JV partner can be a limited member, but the Lender will let you know if they want him to be a guarantor as well. {Residential properties predominantly must be bought under your own names to fit conforming loan standards for non-portfolio lenders.}

If you are buying together under your own names then you need to decide on the structure of the purchase. Will you be Tenants-In-Common, each owning some percentage of the property (i.e., 50%/50%, 70%/30%), or will you be joint tenants each owning 100%, etc. (Seek local legal counsel to determine how your jurisdiction treats each potential setup.)

Let's say you and your JV partner become owners of the property as Tenants-In-Common, then you can enter into a Tenancy-In-Common Agreement that operates similarly to an Operating Agreement for an LLC and it will dictate the agreed upon management, disbursements, capital calls, operation, and financial reporting aspects of your JV investment, and eliminate any confusion between you and your JV partner when it comes to material terms of the arrangement.

Good Luck!