Liability in investing with a partner with student debt

4 Replies

Hello all. 

Background: I'm looking to buy my first multi-family rental property, a spacious two family home caught my eye in Rhode Island for about $180,000-$190,000, which should be able to get $3000 in rent a month, it needs a bit of work but is in a great location with upside. I'm looking to invest with my friend/colleague who does not have too much cash, but is a tremendous worker, dependable, and previously a contractor; he would bring lots of value in turning the property around and wants to live in the home while we fix it up and thereafter (for at least a year maybe two). Anyway, partner has a substantial amount of student debt (I believe $60k or so), I'm concerned how this would affect our arrangement, would I be liable for any of his debt? We would likely form an LLC and be co-borrowers on a Conventional Mortgage together. Granted, this would be worst case scenario and only a tragedy would foresee such events *fingers crossed*.

Thanks, Chris

Hello @Christopher Kolasa ,

Thats great that you're looking to get your first multi! House hack duplex is a great way to start. Plus, you have a great rental market in RI if you market to URI students. 

Speaking about your friend. Instead of looking at his debt, look at his personal philosophy. That will tell you the type of man he is. I would vet him strictly as a business parter, not a friend when it comes to investing. If someone just looked at my student debt I would have never gotten started. I have around 60k also, but I have never been late on any of my bills because I respect the value in making my lenders whole. Regardless of the situation.

My questions: 

  • Student loans: Has he ever been late? Are they refinanced to help lower his monthly debt to income ratio? (You won't be liable for HIS loans, if you form an LLC together, then you are a team. If it fails, then you both owe the debt of that project and any associated fees. It is important to know what type of person he is before getting into bed with him.
  • (in this situation, does he pay his bills)

  • You must plan for the worse in the sense that this IS a business and should be treated as such. Talk to an attorney to see if an LLC is the right type of legal entity for you in your market. Every state is different.
  • How will you split the deal to make it beneficial for both parties? Are you fronting the money and he is going to do the work? 

At the end of the day just make sure you are investing wisely. Take proper precautions, think of multiple exit strategies, and do your due diligence. Best of luck! You are at the best forum for REI!

@Christopher Kolasa Hi Chris,

He sounds like a genuine fellow, I would just make sure he can still make his payments as you take on this project. I do not believe you will be personally liable for his debts but if he finds the income from this property does not cover his payments then he may look to borrow from the profits or you.

Best of luck and congrats on finding a good deal

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Chris, saw a couple of things that I wanted to comment on.  First off, if you are looking to rent to URI students as one post mentioned, you will be limited to towns in South County.  Mainly SK, Narragansett, etc.  No URI student is going to commute from the Providence area down to the campus.  Having said that, there are a number of college rental areas in Providence County.  

You mentioned getting conventional financing. However you also mentioned forming an LLC. If you purchase the property with an LLC, you will not get a conventional loan. You will need a commercial loan, and commercial insurance policy. If you do this, the bank will be looking at the asset, whether it is performing, cash reserves, cash flow, equity, debt servicing, etc. Your personal financial information is not as heavily weighed as in a residential loan.

If you do not buy the business in an LLC, your finances will be weighed upon more heavily, but if the debt to income ratio is in the acceptable threshold, you should be fine.

I don't know if you are able to bring enough cashflow to break even if one side is occupied for 2-3 years by your partner rent free. There might be no cashflow leftover after expenses for your share. Have you calculated your cashflow at half tenant occupied? I doubt your partner would be paying the $1500 market rate. Yes it might cashflow with 2 tenants, but not likely with one. So you would be without cashflow until he moves out. Doesn't sound like a mutually beneficial partnership even if he provides you free labor. You're still out initial materials costs and ongoing repairs costs.