I know very little about rental properties, but I am a homeowner in the Midwest so I know just about as much as anyone else has has bought a home and done a little rehab. 3 coworkers have formed an LLC and have purchased 2 rental properties in the past two years, both are renting to families. I believe the mortgages are $95K and $120K and rent for $950 and $900 respectively. Looking at the equity of the property I could probably pitch in around $15K and own about 20% of the company. They are looking to add another and without enough money for a downpayment I told them I would be willing to become a partner and provide the additional capital. What I'm really looking for is a way to build a solid retirement plan and create a supplemental income. My wife plans to stay at home and raise the kids.
I know this isn't a get rich quick scheme, and I know there are some pitfalls of going into business with coworkers, but I basically just need advice on how to approach this and what questions I should be asking. I should also mention that two of the coworkers just moved to a neighboring state. While they still own part of the company they aren't going to be able to help with any of the upkeep. Also they are looking at purchasing rentals in that state which I would not be able to help with. So hopefully the labor would even out in the long run.
Thanks in advance for all your help!
@Dan Towle - Since you are potentially jumping into an established partnership I think you need:
- Ask for their Schedule E and analyze the actual profit. This should help you determine if the ROI is worth it for you
- Understand what their vacancy and repair costs were and why they are what they are. These can be controlled or not and will be some of your biggest expenses
- Ask about their long term acquisition plan and make sure it aligned with yours
- Ask how they handle tenant issues currently and how they plan to do so from afar
Also start with this free guide on how to analyze property:
And welcome to BP - We are all here to help with any questions you have
welcome to the site.
I wouldn't put your retirement money into partnership like that.
It sounds like a group that has some experience but not a lot.
You are talking about buying into an existing corporation as a partner and taking on it's assets but also it's liabilities.
What if the other partners are weak in a few years and yet you are strong?? Guess what the creditors are all coming after you. They follow the money to get paid.
Check to make sure there is an operating agreement spelling out buying in, selling, etc. with the properties.
If you buy into a partnership there is one tax id. A problem is down the road if you want to 1031 exchange your money without your partners into another property or properties you won't be able to do it. You need a separate tax id number usually set up with a TIC model.
Is this money IRA money?? If so it needs to be non-recourse and set up a certain way. There are so many layers to this it can get complex. If this 15k is only out of 400,000 in cash you have to invest then it is a under 4% gamble if it's non recourse of your total liquid available funds. If it is 15k and you have 20k total then it is a huge risk to your liquidity and savings.
You need to make sure you are very careful not to jump into this quickly. It's a lot harder getting out of a bad situation then buying into it.
@Joel Owens as always, is right on the money. You are buying into a partnership and there are many things to consider in addition to the properties themselves, such as any assumed liabilities that might be walking into. Joel also brought up a really good point, which is the back-end of the transaction, or what many refer to as your exit strategy. You need to give a lot of thought to your exit strategy before you jump into the investment. Partnership interests can complicate the exit strategy, so you should really meet with your tax advisor before jumping in so that you know what your options are. You might even want to involve your potential partners because I'll bet they have not even given this much, if any, thought.
They actually have an excellent partnership agreement which spells out practically everything, ownership, buying in, buying out, marriage/divorce, advances, dissolution, required % for voting to add new members/properties, bookkeeping, etc. It's actually very thorough and well thought through. I can go into more detail on any sections in the agreement if anyone wants me to.
I can understand that there are certain risks when going in with coworkers, but I think all of these guys are very motivated and I'm guessing I actually have the least amount of funding to bring to the table. We're all in agreement though that we don't want to have to add our own capital beyond these initial investments. And one thing that concerns me is their small amount of company savings. I'm guessing it's because they are just starting out, and it will grow..
Also I'm not planning on this being my only source of retirement. I have an excellent 401K starting with a company that gives me a 6% match and an extra 3% on top of that. So that's definitely my primary retirement income, but I would also like to have an income from retirement properties as well.
Joel - you had asked where the money is coming from. I have enough to pay out of pocket, but my dad recently passed and my mom wants to help us out now while we need it, instead of holding onto everything. My dad loved fixing up houses which is one of the reasons why I want to get into real estate.
My wife has brought up the idea of us just buying our own rental, but to me that seems like a lot more of a risk. At least with 3 other coworkers I don't have as much risk, granted I know that there isn't as much immediate reward, but I think the LLC has a better option to do well in the long run.
Thanks for all the advice! I really appreciate it.
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