I was recently introduced to a potential partner through my real estate agent. My agent introduced us because he thought we could be mutually beneficial to each other. He was working in oil and gas and lost his job about 2 years ago and has not been able to find any full time work since. He has had upwards of 5 SFH rentals and still holds 2 or 3. He recently finalized a divorce and due to that had to sell one of them, but from that he still holds a good amount of cash for a down payment. Due to not having a full time job though he cannot get a mortgage though he does have good credit. He does also have some credit card debt that he said is not from misspending but still coping with costs from being laid off. I on the other hand have very little capital to play with but I have good credit and a full time job. So the theory is that we could partner and he provide the Capitol and I help the debt to income ratio. Does anyone have any thoughts on the wisdom of pursing a partnership of this kind with someone I really don't know. He would also help provide experience since I have not done a deal yet.
Anyone have any thoughts?
@Daniel J. I don't see a problem with it. Of course, you'll need to cover all your basis and have in writing who does what. You become what is called a "credit partner." As you don't really know him, I would look to create an LLC that spells out exactly who does what, how, equity/pay, and how to exit. Use the LLC to buy the property. Essentially, he invests his money and when the property is purchased you become the personal guarantor on the LLC's loan. Your terms aren't as favorable because it is a commercial loan, but I think this way allows the greatest risk mitigation.
@Bryan O. So then I would be solely responsible as it were to make sure the loan did not default?
Would it be a commercial loan because it's being loaned to an LLC not a person?
@Daniel J. yes and yes. Your credit would be used to back up the LLC since it has not credit. The bank would require you to sign a guarantee that if the LLC dies, you are still responsible. Loans to an entity are commercial, so anything you buy with that entity will require commercial financing.
In theory, your friend may not need you. If he can find a bank willing to do a non-recourse loan to an entity (like what people buying in IRAs and 401ks must do), he can likely buy based on a higher down payment and the ability of the property to cover the debt. Typically, banks want 40-50% down on those types of loans and the numbers have to work well on paper. Then his personal credit won't matter. With you in the deal, he could get away with 20-30% down, so it will depend what he's really after what way might be better.
@Bryan O. I have heard it's hard to get an LLC funded in the beginning because of a lack of history. Does that not really apply if you are the personal guarantee? Would you also be looking at more like a 15-20 year note as well?
I'm not sure if he has looked into that kind of thing or not. I also don't think he would have enough for a 50% down payment on our area, though I could be wrong.
Hi @Daniel J. . I only have 1 property in an LLC right now with leverage. It was very easy for me to get the loan with a new entity, but they require a personal guarantee to offset that lack of history. I like to leverage as long as I can, but commercial financing for SFR tends is usually 20 years, sometimes 25. These are the trade-offs for entity vs personal. You have to decide if you are willing to take the hit on cash flow and have a 5-7 year balloon with commercial, but gain the flexibility that an entity allows, or if you want better returns with a personal mortgage.
I like full 30-year fixed APR loans, but in some cases it makes more sense to do it in an entity. It really comes down to whatever your own personal scenario is.
@Bryan O. Ok, thanks! I really appreciate the insight!
@Daniel J. If you go with the LLC, be sure to shop around for commercial loans. The terms vary greatly. We are currently in the process of closing on a 12 unit under an LLC with a commercial loan that has a 5 year fixed rate around 4%, no balloon, and a 30 year amortization. Not saying this would be achievable for everyone but just know that not all commercial loans are the same.
@James Lusk How does that work if it's a 5 year loan but no ballon if it's amortized over 30 years?
Its a 30 year loan. The rate is locked at the initial APR for 5 years. After the first 5 years it becomes an adjustable rate at which time you may want to refinance into another locked term depending on what market rates are.
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