Rental Property Investor · Eugene, OR · Member since 2019 · 6 posts · 20 votes
Hello all thanks for reading,
I am working on BRRRR deal that is going to involve cash from my folks. Here's the scenario briefly then ill get to my questions,
Original plan, folks are going to contribute purchase price liquid. I will make purchase/rehab/stabilize rental. House will be owned free and clear for a few years until folks want money back to purchase new primary residence. I will manage property and receive all monthly income. after a few years I will finance the property with the equity position I am shooting for.
My questions are about Loan vs partnership.
If folks made purchase and held title would me receiving all rental income get funky? Need to establish legitimate property management company? Could we just set it up as a partnership where they held equity and I managed property for the income?
Would it be better for them to just loan me the cash for a few years, we hold title and can repay them when we cash out? This seems to be the easiest and most tax eff. but I only say that because I don't know enough about partnerships.
Let me know if you need numbers or anymore info. hopefully what I'm asking makes sense.
I would definitely draw up an agreement of some sort to formalize the partnership.
I would think it would be easiest for them to take title themselves and put you on title also. You will most likely need an interest in the property to manage it without a license - - you do in FL. You could also form an LLC to own the property that you all have ownership in -- it's like $75, or $250 with a lawyer / CPA to draw it up.
Great Dan, thanks for the reply! you helped me work through my question a little better. I guess I'm really wanting to learn more about what make a partnership legit. I understand the benefits of an LLC to some extent but also wondering if a written agreement and shared title something people do.
The first part to making a partnership legitimate is taking it seriously - you seem to be on the right track. Next, you must have a partnership agreement (holding title together) or operating agreement (LLC or other entity) in writing and legally enforceable. Honor your family and spell out every aspect of the deal in one of these two agreements - luckily a good lawyer will have a pre-worked out template that should satisfy your needs. Put this agreement in place before you purchase the deal and ideally before you even get one under contract. Once a deal is under contract it is easy to get lost in the excitement and anticipation and put the agreement on the backburner. The last thing you want is to get into a disagreement without the benefit of a clearly spelled out and legally enforceable plan - this is especially true when it comes to family.
Hi Johnathan, thank you for the thoughtful and thorough response!
I agree with you completely that taking it seriously is the first step. That's the goal here and that is why I'm trying to get all the details worked out while time is on our side. This agreement is only a consideration because they have some cash they're not planning on using for a couple of years and believe that I can take good care of it in the meantime. For me to be interested, I want everyone to understand everything that is involved and the details of what will happen according to plan. Managing expectations. The good thing is were a good team everyone understands that this is a complex and significant deal and that there is significant risk involved. Not a casual, hey here's some money, go do good.. Oh wait you did what?!
After a bunch of research I am leaning towards a partnership for a few reasons specific to our situation. I've reached out to a highly recommended RE attorney and should get a lot of help in the coming week. Feel free to give feedback in the meantime if you'd like.
Were doing this all remotely so proximity plays into our decision as well. Folks in CA, I'm in AK and the deal is in OR. Reason for Oregon is adding property to portfolio, team already in place to manage remotely.
Here is a VERY abbreviated version of my current action plan which is still under construction. any feedback or opinions would be much appreciated.
1)Work out partnership details, have agreement in place, fill in the blanks at time of closing
2) Parents contribute cash for purchase. I manage transaction and closing with my team. We both hold title. They hold all equity they contributed plus recover any appreciation that may occur in future sales. I contribute capital through my time managing and receive all equity from rents minus expenses (Awesome for me I know)!
3) Assuming favorable market conditions (primary plan, have other options if not a good time to sell), after a few years of collecting rents, I finance the property and cash out parents. They receive their initial investment plus any appreciation and apply those funds toward purchase of new primary residence.
That's my big blind spot that I'm trying to get figured. If they are cashing out of a partnership it would be ideal if they could apply those funds through a 1031 to a new purchase (assuming 1031 is still a thing). This is where the partnership could be a better option tax wise. If it were a loan situation we would pay them interest (applicable federal rate, basically nothing). They would pay taxes on that interest also basically nothing but how would they recover the appreciation? I suppose when I finance i could cash out that money and gift it back to them over time? sounds like a PITA. I have a lot to learn here and I'm not just trying to eliminate taxes but be efficient and get them the most out of using their cash for a few years.
Working with the lawyer is a good idea, he/she will hopefully have lots of experience with theses sorts of things and be able to guide you along the way.
Point #2 concerns me a bit. What happens if over the next couple of years the property cash flows nicely but fails to appreciate or even dips a little? In point #3 you mention contingency plans for something like this or at least you allude to it - I would make sure you clearly spell this out especially because it sounds like your parents are expecting some sort of gain at the end of all this.
"Keep it simple stupid" is one of my favorite sayings. I say this to myself all the time and it has saved me grief time and time again. In contracts the simplest ones are generally the best. And as an aside to that, the best contracts all end with both sides feeling like they won (this is even more important when family is in involved).
We had discussed how this could all play out and I think everyone understood the risk involved. But you've definitely helped me want spell those scenarios out in greater detail. They're not expecting returns. If things continue the way they have there should be some excess there. If not, then they understand that too. I am certainly not leading them down a path of chasing short term gains. They are trying to help us out more than anything and if they can get a return all the better. The deal is that if things were to go sideways I'd be on the hook with covering the balance when they wanted their cash back. Those numbers are in the deal and it would just mean I end up with less equity than ideal and a higher monthly payment but still absolutely acceptable. But your are right that the mechanics of how that would look need to be completely understood and that both scenarios are covered in the agreement.
Thanks again for spending the time with me on this!