Loaning money first and then buying into existing LLC

4 Replies

HI all,

I need some help and advice with some of the investment strategies I am planning on doing. Some of these strategies are due to family tension, and hence there's no way around it. I am pretty new to this, and need to what do I need to be aware of, any clauses I should include in contracts, etc.

I am trying to invest in a property with my cousin, and 4 other partners. Initially, I suggested to form a 50%-50% LLC with my cousin, and buy a 20% stake in the property (10% each between my cousin and I). Due to family problems, he does not want to do that, and instead include his wife in the LLC as a 50% partner in LLC. The problem is, he does not have enough money to buy a 20% stake in the property, so he wants me to lend money so his LLC can buy 20% stake. Then after everything is done, and after 4-5 months, I would buy out his wife's stake in the LLC, but won't have to pay since I already loaned him the money initially. So, 20% stake in property is $200k. He forms LLC with his wife, and I loan him $100k. Then few months down the road, I "buy" into his wife's 50% portion of LLC.

1. What kind of contract do I need to form when I loan him the money? Any things I should be aware of? 

2. When I buy into his wife's portion, I technically won't be paying anything since I already loaned 100k. How does that work out? Would she just get out of the LLC and I join?

3. Any ramifications on depreciated basis, etc.? He wants me to buy into LLC before buying taxes.

Thanks! Any thoughts or advice welcomed! 

So, your cousin wants you to loan his LLC half the money he needs to invest in a partnership. You will just be a lender (collecting interest?, monthly payments?), until some period of time has passed. Perhaps your note is due to be paid in full. At this point, your cousin is proposing to give you a half ownership interest in the LLC in full satisfaction of his debt.

I think there is a red flag being raised when the cousin did not want you to partner with him in the first place. Perhaps there will be some quick profit taking that you won't share in. Then when you get an interest in the LLC as satisfaction for the loan, how will you make money? Too many questions unanswered here, for me to feel comfortable.

I would suggest you find a tactful way to back out of the deal.  If there is family tension now, before you have even taken any action, just imagine how much worse it will be later when someone in the deal feels cheated by the other.  

I should make it a little bit clear - He would put down $100k when he forms a LLC with this wife. Since he does not have another $100k to buy the 20% stake, I would (he wants me to) loan him $100k. This would be on a written agreement. After the deal is complete, 4-5 months later and before filing taxes (according to him), I would "buy" out his wife's stake for the 50% ownership in LLC, and thus 10% stake in the property. Since I would have already loaned him the money, I wouldn't pay him again. That's my question - would that work? Just not sure what to include or what out for in written contracts.

I am really against this deal, but it's due to family pressure and the family tensions that I have to go this route. It's a good opportunity to invest that I don't want to let go off.

If you are being pressured to do the deal, then just ask those exerting the pressure why they aren't participating in the deal themselves.  If the deal is really good, most people will find a way to buy into the opportunity.  Could it be that the deal is not really that good in the first place?  

If you are not comfortable, then stand your ground.  You may miss out on a profit, but you won't lose your money or any sleep over this.   

Don't do a deal if you're not completely comfortable with its terms. There's often a lot of pressure to "not miss out," but no deal is so good that you have to put yourself in a compromised position to do it. Shady/irresponsible people can make a great deal turn completely sour in mere minutes. Opportunities are like trains--there's always another one coming.

As for the structure of the deal, you're not going to find a form contract to do this kind of deal. Creative deals are the reason why lawyers exist--find someone who's competent at drafting contracts from scratch. If you try to hack something together yourself, you may regret it in 5 months when something changes again in your cousin's family situation.

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