Partnership - Loans & LLCs

9 Replies

Hey all - Looking for some friendly advice. About to sign on offer letter on a small multi-family investment property in New Jersey.

I have explored the use of a 50/50 partnership with a good friend of mine who will live in the property and manage it for us. Although I will put up most of the down payment, he will be in charge of managing the property and doing some of the rehabbing. We have set up a payment plan for him to pay me back his portion of down payment and have outlined all responsibilities. 

When it comes to financing, here is where I have a dilemma. Currently, I am personally pre-qualified for a loan through a conventional bank based on my personal net worth and income.  However for a partnership, my options as I understand them from my research are:

1. Setup an LLC with both of us as 50/50 partners. Work with my mortgage broker to either secure the loan under the LLC to start (with my personal income as guarantee) or secure the loan under my name first and transfer deed at a later date (running the risk of "due at sale" clause)

2. Secure the loan under my name; Work up a partnership agreement that splits the expenses and income in the 50/50 arrangement

3. Secure the loan under both of our names. Work up a partnership agreement that splits the expenses and income in the 50/50 arrangement

I prefer #1 but not sure if I can pull it off. Will be talking to my mortgage broker later today...

Any thoughts on this much appreciated!! How do others typically set up partnerships and loans?

Thanks

Nick

What happens if he stops paying? Is it an eviction (easier) or a foreclosure (hard to impossible if you don't have the right loan docs and structure)? Just playing devil's advocate but if you were to structure this incorrectly it could be very messy if things went South. I'd definitely get legal advice (from a lawyer), not a forum. 

I agree with Troy, you should get legal advise. #1 is what we typically do and the loan will be with your guarantee. The lender should not have to much of an issue. As for the potential downfall, documents are for rainy days, if every thing goes well, then no one worries about the documents. When things go south, watchout. Make sure your atty includes lots of default language in the partnership.

You definitely want to do option # 1 with 50/50 partnership. However, both of you will be signing the loan documents (As the managing partners of the LLC) so the bank could technically come after both of you in case of defaults. You also want a strong and detailed LLC operations agreement that outlines each responsibilities and financial structure to alleviate some of the partnership concerns and potential downfalls.

Originally posted by @Nick Intrieri :

Hey all - Looking for some friendly advice. About to sign on offer letter on a small multi-family investment property in New Jersey.

I have explored the use of a 50/50 partnership with a good friend of mine who will live in the property and manage it for us. Although I will put up most of the down payment, he will be in charge of managing the property and doing some of the rehabbing. We have set up a payment plan for him to pay me back his portion of down payment and have outlined all responsibilities. 

When it comes to financing, here is where I have a dilemma. Currently, I am personally pre-qualified for a loan through a conventional bank based on my personal net worth and income.  However for a partnership, my options as I understand them from my research are:

1. Setup an LLC with both of us as 50/50 partners. Work with my mortgage broker to either secure the loan under the LLC to start (with my personal income as guarantee) or secure the loan under my name first and transfer deed at a later date (running the risk of "due at sale" clause)

2. Secure the loan under my name; Work up a partnership agreement that splits the expenses and income in the 50/50 arrangement

3. Secure the loan under both of our names. Work up a partnership agreement that splits the expenses and income in the 50/50 arrangement

I prefer #1 but not sure if I can pull it off. Will be talking to my mortgage broker later today...

Any thoughts on this much appreciated!! How do others typically set up partnerships and loans?

Thanks

Nick

Since you are buying a multi-family property, this is going to be a business as well as an investment. You should definitely consider buying it in an LLC or limited partnership structure for liability protection(don't buy it as a partnership between the 2 of you in your names, as that is a general partnership and you are still exposed). Your bank will still want a personal guaranty, so you don't get off the hook for the loan by using a company, but it could save you potential catastrophic results if a tenant sues. Please talk to an attorney...

My biggest concern is the guy will be owner (part owner anyway) AND living in it. If he decided to stop paying/managing/giving a f#ck, you likely couldn't evict him. He's a homeowner at that point. You'd have to foreclose, if it's even possible. Imagine if you didn't have a mortgage setup? 

It could get really messy if not setup properly. 

Thanks all for the advice. Option #1 (LLC) is definately the preferred path. However in speaking to my mortgage broker (since this post), his comments: were "They usually only give loans to people, not companies with no credit history." I mentioned the idea of a personal guarantee that I sign off on behalf of the entity. He is going to check with underwriting and see if that's something they can do....but I'm not confident. And I'm not comfortable changing the title after the fact due to the "due on sale" clause.

So my follow up question is how do you initially setup an LLC if you need a loan? Or is that only possible through other funding mechanisms (cash, private money)? Everyone says LLC best way to go in a partnership for real estate business, and I agree.....but it seems impossible to do + conventional financing. Do I need to talk to another bank?

And definately will review operating/partnership agreement with an attorney. Will include clauses for non payment as well as everything else I can think of...

Thanks!!

Look for a commercial lender.

on a side note, that deal scares me. I hope you have thought through all of the possible downfalls of the situation. don't skimp on the attorney. Listen to him carefully. 

Good luck

Nick, you said small multi-family, so I'm assuming 4 or less units? In that scenario, you will not be able to secure a loan to an LLC. You can transfer the deed after you close, and you should, but that's only for liability. The mortgage will still be secured by you personally, and I agree your partner should share that liability.

Medium picco logoVincent Priore, Picco Partners | [email protected] | http://www.piccopartners.com

Thanks Vincent. Yes it is only a 2 family.

I am worried about "due on sale" if I transfer deed post sale to LLC. I will see what my attorney says. Worst case going to go with a partnership agreement, loan in both names, and the umbrella insurance policy.

Basically my mortgage broker from Wells Fargo told me in so many words, "technically yes they could exercise due on sale but not likely as long as payments are made on time. "