First Time Investor Question

6 Replies

So my wife & I have been looking to invest in real estate in St. Louis, MO for the past 6 months or so, and really would like to start with multifamily. We already own a home that we'd like to stay in. One of my single friends is looking to buy his first property to live in, and so my thought was that we could go in together on a nice 2-4 unit building, and that we could split the property. He would then live in one of the units, and we could rent out the others. My wife & I currently have a conventional loan on our home, and we're at 20% equity.

My questions are:

1) What are the down sides to him living in and us living out? Anything specific to worry about?

2) My thought was to start an LLC with myself and my buddy as co-owners with a 50/50 split. Would this be possible to do and still be able to get an FHA loan for 3.5% down?

3)Has anyone structured something like this before that could give me an idea of the best way to do it?

Any help would be appreciated!

Why do you need him involved?

1. Worry about the friendship going bad for whatever reason and then you are stuck with an adversarial business partner and tenant.

2. You can not get an FHA loan with an LLC so you couldn't co-own with your half being an LLC. Also, if you and your wife are one side and he is the other, you need to be clear on who gets a deciding vote on anything. It should be you since you have 2 to 1 people on your half.

Thanks for the quick reply! 

The thought initially was so we could get an FHA loan on one, as my wife and I do not want to move into a multifamily. I also like partnerships and expect we'd buy more properties together in the future. We could also afford a nicer property in a better part of town where I believe there is more potential upside on appreciation than areas we would be able to afford if we run it just my wife & I.

If we didn't do an LLC could we just put it in our names and still split? Then in the future refi and put it under an LLC that we start?

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@Michael Mainini  

As said above, you have to get the mortgage under a person or people, as opposed to an entity. Then, after 6-12 months you can move the title to the LLC, but not the mortgage. It could also trigger the "due on sale" clause, so look into that. It doesn't usually happen if you're in good standing.

Feel free to reach out.  I have helped a few people get started here in STL, and Im happy to help however I can.

I don't do partnerships (they're the only ships that always sink) so I'm biased but this is a horrible idea.  

How old are you?  Your "friends" will change.  All of a sudden you have a non-paying "friend" because smoking weed and going to bars is more important. Now what?

Your "friend" gets a girlfriend and she hates the idea of living in a multifamily and she thinks you're taking advantage of him. Now what?

Your "friend" wants to get out and sell it because he hates his neighbors and doesn't like being a landlord.  Now what?

Your "friend" dies and your new partner is his mom.  Now what?

Partnerships, great in theory until they don't work in reality then they're horrible.

Like marriage  partnerships fail when one of you is unnecessary.

What value will be brought to this from the other?  The 3.5%?  Woo-hoo. 

@Michael Mainini nothing wrong with a partnership if you're partnering with someone you have been able to trust for many years but regardless make sure you have a legally sound agreement between all partners that leaves no doubt in case there are disagreements. Only you know the other person. Use your best judgment.