Forgive me if this has been discussed, I couldn't find anything on it. I have a great tenant who wants to buy a house next year. He's never done any rental work or investing, but he's very interested. I'm wondering if this is possible:
1. Create an LLC for the two of us
2. Contract to provide him a down payment for a 4-family in exchange for 50% ownership, and agree to be responsible for half the mortgage amount (to the LLC & eachother, not the bank)
3. He acquires an FHA loan on the property himself, and moves in. He gets to rent out one other unit
4. I rent out 2 units
5. After a year or two, he can move out and rent both of his units
@Bryan Faust You can't use an LLC for an FHA loan. It sounds like what you're in need of is a promissory note and contract to cover the agreement between you two. I've never done this personally, but I'd imagine you'd have a signed agreement stating the exact terms of the situation. And then you'd have a promissory note to cover your financial obligation to him, since he'll have the mortgage in his name.
What is the benefit of doing this? This sounds like way too much effort for a weird agreement.
If you're low on cash and can't get a property yourself, then look for creative financing options with property owners. Here's how I landed my first investment property when low on cash:
I wouldn't put the mortgage in the LLC, I would use the LLC as the basis of our agreement, then I'd have a way to claim ownership of half the property. Essentially all I'm trying to do is create an equity share agreement by providing the down payment money. It doesn't strike me as that crazy when everyone on here talks about being creative about things. Maybe it is.
@Bryan Faust You would have 50% ownership of an LLC that owns nothing. That makes no sense to me. Their name would be on the mortgage, not the LLC.
Is there a way to do what I'm suggesting somehow that I'm not asking correctly then? Essentially I'm looking to become a 50% equity partner with someone who would house hack a 4-family with an FHA loan.
I don't need to be on the mortgage to do that do I ?
@Bryan Faust You will not be on the mortgage. What I'm concerned with is your friend not having 3.5% for the down payment. If that's the case, then your money will be seen as a gift. And gift's for FHA loans are only allowed from family members. So this scenario would not be allowed.
It's not that he doesn't have the money, he wants to partner with me for my experience as a landlord and abilities with maintenance. I'm not clear on what legally happens to be granted an equity share in a property. That was my question and reason for suggesting he and I form a 50/50 LLC somehow.
Additionally, he could get the mortgage, and then I could "buy in" through a personal contract somehow after the fact couldn't I?
I certainly appreciate your ideas to be creative. As a newbie myself, it’s something i often hear about but am not totally sure on all of the parameters. My two cents...
Once your partner buys the property via an FHA loan, anything you do to try and add your name to the mortgage or have an LLC take over the mortgage, triggers the due on sale clause.
I also don’t hear about people working out creative partnership deals for house hacks. Typically, house hacks are done by a single person or spouses. I think trying to make that work could potentially cause problems and may not be workable.
If i read correctly, your partner wants to bring you in primarily for your property management skills? If that’s the case, why not be his property manager and skip the ownership stuff?
Another tidbit, I’ve never heard of a partnership where each partner is assigned certain units to operate. Typically, the duties are divided up and the profits are shared. If you’re both operating each of your two units, it sounds like there’s going to be a lot of duplication of efforts and possible issues.
If your both truly want to be owners, you could try and find a portfolio lender or use a commercial loan for the 4 unit. Both permit LLC's to be owners. Obviously, the terms are different and may not be as appealing.
Why not pool your money and get a larger deal?
From what I understand, due on sale is virtually never an actual issue. Though that's certainly not a given. But many people on here discuss the topic and very few, if any, actually experience the problem.
I don't want to be a property manger, I want to be an equity partner. If we had vast sums of cash to pool, we wouldn't need each other's help. I guess I didn't literally mean "these are your two units and these are mine" it's just a simple way of looking at it for running the math to see what it should be worth to me. Essentially it would be like each buying a duplex. We wouldn't keep the maintenance costs separate physically that would just be silly.
All I'm asking here, and nobody seems to be able to give me an answer, is whether or not there's a way to become an equity partner with someone who buys a 4-family with an FHA and house hacks it. I know most people do that alone, but if he wants to house hack for a year and then buy his own actual long term house, I'd be essentially providing him with the down payment for his future house in order to buy into the 4-family.
@Bryan Faust If there is a legal way to do it....an experience fha loan officer can tell you how. I know you Can be his partner, no llc, with both your names on the title mtg....but the down payment is significantly higher...google “fha non occupant coborrower”.
The non-occupant option defeats any benefit to the FHA mortgage in the first place. What I'm trying to do is let my partner purchase the property on his own, and then jump in as an equity partner after he's secured the loan. I'm not sure if there's a way to do that contractually between the two of us without being on the actual title or mortgage.
I know in the corporate world such a thing exists where you can buy "ghost shares" of a privately held company; in that you are entitled to your percentage of the profits and losses of a company from an operational standpoint, but technically don't own it. This is all I'm truly after.