My dad and I have partnered on two flips and one single family rental over about two years. We purchased each deal with cash and had the properties in our LLC so we both had part ownership of each property.
We would like to start leveraging the properties we buy and start using the BRRRR method. How does this work if an LLC can not typically qualify for the refinancing of the property? Are their lenders out there that work better with corporations and LLC's? Is there some way it can work where we both still have ownership of the property, can refinance the property, and still protect our assets?
My worries are:
1. Dealing with the due on sale clause (I realize it is rare to be called on it, but we want to be safe)
2. How could we split the cashflow and profit at the time of sale if the property is only purchased under one name?
3. If the property is titled under both of our names would that complicate things on the financing end? He would definitely qualify for significantly more than me.
4. We both have assets that need to be protected.
Any suggestions would be very much appreciated! I'm sure there are others out there wanting to partner up with friends/family wondering the same thing. Thanks!
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Great Question, I'm looking to start a partnership with the same goals and have been wondering about this for some time. Any info would be very helpful!
@Ryan Stevens I am the EVP of Lifestyles Unlimited (always like to get that out up front :-). So glad you are asking these questions up front! I am going to answer your questions in a different order so bear with me...
4. The best way to protect your assets is with the right insurance coverage on your property. Holding property in a LLC does not guarantee protection and a good attorney can usually find a way through to your personal assets. If you have the proper insurance coverage on each property and an umbrella liability policy that reduces your risk. If you are still concerned, consider putting your personal assets and wealth in a trust. Nevada has created one that even the IRS has not been able to bust - that is impressive! in the interest of some brevity, message me if you need more information on these trusts and I can give you some states and names of trusts to look into with your attorney and financial advisors.
3. It is only complicated for financing if one of you has issues making it hard to get a loan or causing higher interest. This would be issues like a bankruptcy, low credit score, several past due accounts or late pays, foreclosure, not enough income because retired etc... If you can both get loans on your own it would be best to buy properties in just one name and develop separate portfolios. If your Dad is helping you to qualify, but you have good credit there should not be an issue with qualifying in both names. Here is another idea though, if your dad can qualify on his own he can purchase the property and you can contribute to the deal with cash or operations and he can create a trust or will where you inherit the property. When he passes, you inherit the property at a stepped up basis capturing the equity tax free. There are lots of options for you to work together that will be good for both of you. I do this with my mom and she also has done this with my kids. Also, in some states you can be on the deed even if you are not on the loan.
2. Again, there are a lot of options for this. You can have a partnership agreement where he is on the loan and you handle operations and the profit is split however you like after the loan is paid off. I would talk with your accountant about this. I am a big believer in written agreements ESPECIALLY when doing business with family or friends. Its worth paying an attorney to get one done that can possibly be used for subsequent deals as well.
1. The mortgage holder usually discovers that ownership has changed in the case of a wrap or other creative methods when the name on the insurance policy changes. This is something they look at. Again, there are ways to handle these transactions that will not trigger the due on sale clause. If you currently own these properties in an LLC you may be able to refinance into yours or your Dad's name at a lower interest rate, since the best loans are usually Fannie Mae guaranteed loans that do not typically allow you to hold the property in an LLC. If you do not want to refinance at this time you might just contact the lender and ask if you can transfer title into your personal name instead. May take some paperwork and run around but they may do it....again, lots of options to look at here.
The overall message is this, real estate is a GREAT vehicle for creating wealth and passive income. The fun thing about spending time with successful real estate investors, as you have probably observed here on Bigger Pockets, is that they are terrific problem solvers and love the challenge of finding creative solutions to get things done.
Feel free to add more detail if my answers are not quite on the mark!
I hope this helps,
Because LLC's don't qualify under conventional guidelines, you need to shop for a commercial lender; one that does no income verification loans would work or your local bank's commercial group if you can both go full doc.
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