First multi-family purchase partnering with family

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Hi! I am looking to buy my first multi-family. I have a sister that would like to invest cash as a silent partner. My mother and I will be splitting the remainder. Do you have any advice on how to protect all three parties? Who’s name should be on the mortgage/deed. Was planning to quick claim to an LLC at closing but the LLC forum didn’t seem to highlight that idea. We have a meeting scheduled with our RE attorney. Any advice at all would be greatly appreciated.

Hi @Jennifer Dorsey . Be careful having a "silent partner." If your sister lost her money, she could technically sue you as what she really invested in was a security. 

Instead, give her a small role to play in the business, which no longer makes it a security. The only other option would be to register it as an exemption to a security, but you'll likely pay $10K+ to a securities attorney to set it up this way. This is known as a syndication, and doesn't make much sense for 1 investor and 3 total partners. 

As for protecting all parties, I would form an LLC with the three of you. I recommend doing this before you find the property, but at a minimum I would do this between getting it under contract and closing on the property. This LLC will be on the mortgage/deed, with you three likely being guarantors on the mortgage. Doing a quit claim after closing just adds more complexity that you don't really need. Just set it up right originally.

If your sister is silent, then you should be filing with the SEC. This still may be worth it if you are buying a $2mm+ building. The typical cost to do the PPM, make the filings and all the other paperwork is $8,000-$12,000

Have a lawyer draw up your partnership agreement. Probably better to just pay your sister interest on a loan than to partner.

You do not need a LLC and it will only complicate your business and waste money. Adequate insurance is all you need on the property for protection. Don't complicate your investment with a LLC.

@Jennifer Dorsey I suggest you consult with a corporate/syndication attorney if your RE attorney is not familiar with SEC exemptions and securities. @Sam Grooms & @Todd Dexheimer are on point. Another solution to consider is simply titling the property into the 3 individual names and apportion ownership accordingly on the deed itself, but an LLC typically insulates liability (may also be treated differently for tax purposes). If this is a financed property, your bank/lender may have guidance/requirements as to the ownership structure. Also, if you intend to self manage the property, it may be prudent to put an agreement together, to that end, if your sister is not contributing to the management - and check your state real estate licensure laws not to run afoul of the unlicensed practice of real estate.

This is not legal advice and does not create an attorney client relationship.

@Jennifer Dorsey If you plan to have all three of you on the contract and as others suggested to avoid dealing with securities, give everyone some roles. Also specify each other responsibilities in the Operating Agreement and decide what would be the ways to exit if needed. Consider looking into TIC (tenancy in common structure) that allows each individual party to sell their interest in the investment independently of other partners.

Whatever you do, have it written up in a Operating Agreement or something similar before you purchase. Do not assume you all agree to anything, let alone who is responsible for what and who is paying for what. I just formed an LLC, but that was between three unrelated partners, and we are all kicking in the same investment dollars to start. We also wrote up a buy/sell agreement, so we can make sure one partner doesn't just sell their share to anybody. If a partner wants to sell, the LLC gets first dibs, then the partners, then an outside interest. Also, if you do a quit claim deed after the purchase, watch out for "due on sale" clause. I'm still waiting for my mortgage company to state it is ok to transfer my duplex over to an LLC without them calling in the loan.