Another Partnership Structuring Question

8 Replies

My friend and I are planning on investing in a SFR rental property in Houston and are unsure the best route to take in regards to structuring the partnership. I've gone through forums and other online resources but still have some questions about the best route to take.

We initially thought about creating a Series LLC then pooling money for the initial investment and getting financing from a portfolio lender under the LLC. However, as interest rates charged to LLCs are so much higher this way, we've also discussed one of us being the one to take out a conventional mortgage. If we go the second route, there would be no LLC so how would we protect the other partner's interest? Some other kind of legal agreement?

We are definitely open to other structures so any advice would be great. Thanks for your time.

If you are not going to use an entity then a simple general partnership agreement would suffice. In your partnership you would almost create a quasi-operating agreement similar to an LLC with how you will run and manage your partnership, how the partnership will be funded, how profits will be distributed, etc.

Toan: 

A general partnership will not protect anything. A limited partnership is better but in Texas it is much more expensive to set up and maintain (for one, you'll have to have an LLC as the GP and give it all the liability if you want it structured correctly). All things being equal, a Texas LLC or Series LLC is usually the better choice (and is worth the added point of interest).

Best of luck! 

Bradley

Originally posted by @Toan Pham :

My friend and I are planning on investing in a SFR rental property in Houston and are unsure the best route to take in regards to structuring the partnership. I've gone through forums and other online resources but still have some questions about the best route to take.

We initially thought about creating a Series LLC then pooling money for the initial investment and getting financing from a portfolio lender under the LLC. However, as interest rates charged to LLCs are so much higher this way, we've also discussed one of us being the one to take out a conventional mortgage. If we go the second route, there would be no LLC so how would we protect the other partner's interest? Some other kind of legal agreement?

We are definitely open to other structures so any advice would be great. Thanks for your time.

Keep in mind you are probably going to have to register this entity in CA anyway. You may want to look at having a holding LLC yourself in order to avoid the number of entities doing business in CA resulting in thousands of franchise fees to CA.

Here in the DFW area, the banks who will close real estate with a commerical loan will not loan to an entity in a Series LLC. I have several commercial loans with 2 different banks and they say that the Series LLC has not been thoroughly tested in the courts.

I have an individual LLC that holds my SF properties and three separate individual LLC's for properties that I have in partnership with three other people.

In my opinion, there is no need to have a separate LLC for each SF property. It becomes a challenge to keep all the funds, invoices, etc separate. If there is any commingling, you would end up loosing the protection of the LLC and have wasted all the time and costs of creating a complicated structure,

An apartment or commercial property should only be held in a stand alone LLC, regardless of the jurisdiction.

The two commercial banks I use only charge about 3/8 to .5 more than an owner occupant. However, the maturity dates are shorter, one offers 20 year amortizations, the other 25.

Toan, send me a private message and I'll point you at a few.

Just FYI, if you have not done any transactions, then the terms may be harsh with the commercial loans - I have heard them offering only 12 to 15 year amortizations with a 3 or 5 year balloon.  If you are experianced and have properties, you should be able to get up to a 25 year amortization.  Most banks around here prefer a 20 year amorization, but will go to 25.

Why not make it simple and both of you put down an equal amount on the down payment then use conventional financing. Make a simple agreement between both of you.

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