New to Real Estate · ATL, GA · Member since 2023 · 1 post · 0 votes
Hi Everyone!
Close relatives buying rental property together but one person (myself) will be the operator with down payment help from family members. I'm curious on how best to structure this approach: Who owns what, who gets what, rental income & depreciation (all tax treatment). I've thought of 3 different approaches -
1. co-borrow...multiple parties on deed, entitled to % rent & depreciation based on investment, have "access" to property
2. co-sign...multiple parties not on deed, negotiate % rent & depreciation based on investment, no legal access to property
3. side-deal...parties gifts the down payment, operator must qualify for loan, all other details TBD
Are there more approaches/options?
Not sure what I wrote above is accurate or relevant, looking for feedback on how other's have handled this and why, what are the advantages or disadvantages, things to avoid, etc.
I have done a few deals with family and friends, and the Most important piece to this deal is ensuring that whichever direction you move in is clearly explained to all parties, written down on paper (preferrably with an attorney) and signed off on by all parties. This will help avoid many headaches down the road.
I would recommend breaking out the roles and responsibilities into percentages and then working from there. In my eyes the downpayment/closing cost/upfront money is worth 50% of a residential deal, and all of the other items that go into operating that property (i.e. Property management, project management, etc) make up the remaining 50%. For example if the downpayment is $100k and they put in $50k i would give 25% of the overall ownership of the deal and the cashflow to that individual. If you are self managing i would recommend taking a self management fee of 6 to 10% (as if you were paying property management) and then start splitting on the profit coming in.
There are many directions you can take this, the above are just high level ways that i have done it in the past
If your bank will finance the purchase to an LLC? That would be preferable imho. If not, you could take title as an individual and later transfer to an LLC (you might trigger some due on sale and/or transfer tax, so get legal representation on that).
If LLC is not possible, I've used Revocable Living Trusts many times. It does not give you the protection of a properly formed LLC, but it does provide a bit of anonymity and can spell out the division of income to the beneficiaries in the trust docs.
There should be no transfer tax involved with the trust, and it will not trigger any due-on-sale clause thanks to Garn-St Germain.
BTW, if you do use a trust, only record the Deed into Trust, but NOT the entire trust declaration. See a qualified lawyer if this is your first time.