Private lender terms advice

4 Replies

BP community,

I have a friend who is interested in providing his capital for me to acquire multi-unit rental properties.  This friend is in a high tax bracket and as a result is not interested in the cash flow or even interest off the money but rather willing to fund properties for the depreciation.  (I'm not entirely sure how this would work so I would also welcome  advice on the structuring of this arrangement but this is not my question.)  He  suggested that we both bring 50% to the deal (he wants to avoid another lender position on the property), I get the cash flow and he gets the depreciation.  The problem is that 50% would limit me to 1 or 2 deals, whereas my goal is to leverage the limited capital I have for several properties.

My question:  What is a fair arrangement for both of us to get into deals where my friend would a) be the only lender on the property, and b) gain the depreciation from the property; and I would a) receive most or all of the cash flow, and b) not deplete my own capital reserves in bulk on 1 or 2 deals?

I'm just starting out and have only had 1 sfr rental, and though I desire to someday own a large portfolio of multi-units, I'm not yet there so we are really talking 2-10 units likely to start off.

Thank you for any help and advice!

Originally posted by @Phil Christie :

BP community,

I have a friend who is interested in providing his capital for me to acquire multi-unit rental properties.  This friend is in a high tax bracket and as a result is not interested in the cash flow or even interest off the money but rather willing to fund properties for the depreciation.  (I'm not entirely sure how this would work so I would also welcome  advice on the structuring of this arrangement but this is not my question.)  He  suggested that we both bring 50% to the deal (he wants to avoid another lender position on the property), I get the cash flow and he gets the depreciation.  The problem is that 50% would limit me to 1 or 2 deals, whereas my goal is to leverage the limited capital I have for several properties.

My question:  What is a fair arrangement for both of us to get into deals where my friend would a) be the only lender on the property, and b) gain the depreciation from the property; and I would a) receive most or all of the cash flow, and b) not deplete my own capital reserves in bulk on 1 or 2 deals?

I'm just starting out and have only had 1 sfr rental, and though I desire to someday own a large portfolio of multi-units, I'm not yet there so we are really talking 2-10 units likely to start off.

Thank you for any help and advice!

 If he is just a lender he would not get depreciation.  You would need to consult a accountant or CPA, but I have partners and when I do our 1065 form and issue a K1 we each get depreciation based on our ownership percentage.  So I am not sure you could have 1 partner get 100% of the depreciation.  

I'm not sure what's the best route to take here. @Brie Schmidt gives a good idea. I would also say definitely consult a CPA + Real Estate/tax counsel. 

I would think, in order to benefit from the depreciation he would have to be an owner of the property.

the only way for him to get the tax break would be for ownership you could take a lower percentage ownership and he could take a higher depreciation than you as having less ownership interest.

It seems likely I'll have less ownership interest, but I'll consult with a CPA.

Thank you all for the advice!

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