Not Married but want to co-own rental

Tax, SDIRAs & Cost Segregation
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Not Married but want to co-own rental

Case Stiglbauer
Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote

Hopefully a new(ish) topic.

My partner and I have been together ten years. We’ve been living together for 6 or so, financed a car together, and have intertwined finances.

We want to buy our first rental property, but are stumped as to how to mitigate financial risk (say through a joint llc) without making our taxes an endless nightmare (schedule E and 1040?).

Are any others out there in a similar scenario? Does insurance negate the need to protect personal finances through llc? What other options are available?

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Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y

@Case Stiglbauer

What are your finances like, for both of you? House hack a 2-4 unit on fha loan in your name only. Live there 1 year. Then do the same thing in her name only. Two fha loans. Cheap money down. Write up legal docs, notarized, for inheritance purposes for all properties, to protect each other.

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  • Matt Nusbaum
    Rental Property Investor · Annapolis, MD · Member since 2011 · 232 posts · 170 votes
    7y

    Hi @Case Stiglbauer I think your best bet would be to speak with a CPA and then attorney. A simple contract/legal agreement might be enough. 

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Case Stiglbauer Insurance is good enough for some people in some situations. An LLC is not perfect liability protection. In part it is a personal decision regarding your risk tolerance and other assets you have to protect. Another factor is how large you intend to grow your rental business.

    The simplest way is probably an LLC taxed as a partnership.

    It is good to get some ideas here but this is something that you should really talk to a competent attorney about.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    Don't use a LLC, it is not necessary and no more protection than insurance. Keep it simple, no need for LLC.

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  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    Thanks for responses. We don’t intend to grow beyond a few properties. This is for sure a longer term buy and hold scenario.

    As far as assets to protect, we are mainly concerned about our personal finances. Funny enough, she is an attorney and I am a financial consultant for health insurance co’s. However neither of us have any professional interaction with the real estate world.

    The next step seems to be learn more about protections provided by insurance. I’ve already started to fill this gap in my understanding, but any relevant resources are appreciated.

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  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    And no. Apparently I don’t understand the post paragraph spacing in these forums yet.

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  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Case Stiglbauer

    What are your finances like, for both of you? House hack a 2-4 unit on fha loan in your name only. Live there 1 year. Then do the same thing in her name only. Two fha loans. Cheap money down. Write up legal docs, notarized, for inheritance purposes for all properties, to protect each other.

    5Reply
  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @Anthony Wick

    Somehow you read my mind. Living in downtown Madison is expensive relative to rest of area and property should continue to appreciate as university and hiring grow. Because our goal is to achieve close to stock market ROI while building equity thru holding rental properties long term (we shouldn't need to access the equity/down payment soon), I think House Hack via FHA is possible. We also want to continue to live downtown for a while longer so that would be perfect.

    One wrinkle is we still need/want to buy a relatively inexpensive house on a family farm in the next couple of years. Not necessary for this post, but we were hoping to use our FHA slot there.

    Anyway, are there examples of the necessary legal docs? Would they simply be the docs that strictly business partners would enter into with joint ownership of a rental property?

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  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    Lol wish I could edit posts. To be clear - Our CoC ROI expectation is from cash flow from the units (and not appreciation). It may be difficult because of high housing prices and relatively low rental rates, but we are trying to find our first property to make that work.

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  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Case Stiglbauer

    We chose to write up a will, as opposed to a partnership in this situation. That’s not an idea for everybody, as it does require a level of trust. But I’m sure an attorney could write up a simple partnership, or have ideas for your situation.

    Maybe an fha for 2-4 plex and then an fha for single

    Family home. That does require each of you to qualify for loans on your own, but it sounds like you're both successful professionals. Or you'd have to refinance one of the FHA's into a conventional before you could buy the third property with fha. Or a conventional loan for third property jointly.

    We chose to buy with as little down as we could (but still cash flow properties) so we could save cash for more properties.

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  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @Anthony Wick

    This seems like a great lead. We’ve only been prequalified for an owner occupied loan together, but I’m confident we would qualify individually.

    I understand your will and basic human trust approach with your partner. I am in an equally trusting relationship. However knowing too many family and tax lawyers has tainted us.

    So my next three areas of research are:

    (1) To what extend does insurance on a rental property protect your personal assets? (2) What type of non-entity legal agreements are available for rental property owners? (3) How do non-married, non-entity co-owners manage their taxes?

    Thanks to all for helping me form my thoughts and thanks in advance for future suggestions.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Case Stiglbauer

    Creating an LLC with you and your partner as members may require the filing of a partnership return which does add to the administrative complexities.
    The partnership return will then issue you and your partner a K-1 that will be reported on both of your returns separately. 

    However, if you own the property as tenants in common - there is no separate partnership return filing.

    Something to consider when discussing with your accountant/attorney.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
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  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @Basit Siddiqi

    Possibly a whole new world opening to me. I didn’t realize that joint-tenant or tenancy-in-common was an acceptable form of ownership when receiving and reporting rental income.

    Wow the homework is building up quickly. Thank you for your help.

    0Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    7y

    @Case Stiglbauer I am replying about your investing more than the structure. I am a big believer in LLCs, but I'll leave that to the Pros to help you with. 

    I am an hour north of you in Reedsburg/Baraboo area. My investing partners and I have 29 units up here and have no trouble finding units that fit 'the 1 percent rule', meaning monthly rents are 1% of purchase price.

     One of my partners has been looking in Madison for a rental duplex that he could eventually use one unit of for a summer home when he retires. As you know, Madison prices are sky high. You would be hard pressed to find a 'half percent rule' in most areas. At best you *might* be able to cover payment, taxes and insurance, with nothing for cap ex, repairs, vacancy, property management and the like. Cash on cash is almost non existent if you are using leverage. 

    Have you thought about investing in the surrounding areas? Much better C on C, and I beleive long term returns too. Maybe a couple outside of Madison and then evnetually a house hack in Madison?

    Feel free to hit me up if you want to discuss that thought at all. 

    Dan Dietz

    [email protected]608-524-4899
    1Reply
  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @Daniel Dietz

    Wow this is my first post on the forums and this is unbelievably helpful.

    I’m glad to hear you are having success near Baraboo! We have family ties in a few towns to the south (think Stoughton) that would probably be easier to find units in, but we love Madison and want to keep looking for something that will at least come close to positive cash flow (after accounting for expenses through the usual analysis).

    In time, we may concede and wish we had listened to you. For now, we want to try to find a place that works for house hacking. I wish I had more ammunition against the argument that we shouldn’t simply “hope” for appreciation, but we also want a place downtown to live and still have income from W2 jobs.

    In short, I’m going to give it a little more time to learn for myself and may reach out to you if I find it’s not feasible.

    1Reply
  • Jim D.
    Investor · United States · Member since 2015 · 415 posts · 487 votes
    7y

    Side note: you shouldn't have a problem buying that farmhouse with a low down payment even if you've done a few rentals first. Single family homes can typically be purchased with 5% down conventional if you are owner occupying. 

    Use up your conventional HomePossible loans first before going to FHA; they accomplish the same thing and have better terms.

    0Reply
  • Tanya F.
    Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
    7y

    Welcome to BP, Case!

    We're in Madison, not married, and own three buildings that we rent out (total 6 units)- one is for sale (Eau Claire) so we will be downsizing to 5 units. Owned places together for 19 years now, been together for 21 years. It all goes on my taxes, on Schedule E. No LLC for us. The rental income cash flow pays for all of our living expenses, so that's how we both benefit. You can figure out whose taxes would benefit most and see. Alternatively, you can split everything in half, so half of everything goes on both your taxes, but I think that could be more complicated to document (with property tax, mortgage interest 1098s, spreadsheets for expenses, that sort of thing). Ask a CPA though. We have a separate joint account we use for everything related to the rentals, so it's cleanly separated from our non-rental finances. We also have joint credit card accounts that we use only for rental expenses. Our system evolved over the last decade, it's pretty simple and straightforward now.

    P.S. There are BP meetups every other Weds at the Brink on E. Washington. Look for details posted on here by @Hussain Harun. Next one is on the 10th.

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Case Stiglbauer With everything I said, I should also point out that I also have an LLC wherein two unrelated partners (not my girlfriend) and I have also purchased rentals (and looking for a 4 plex in the Des Moines, Ankeny, Ames, Iowa area if anybody local is reading this!). I definitely use a real estate attorney and a CPA. It is well worth the money to hire the experts. And in your case I wouldn't move forward until I consulted with both.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    It is strange that people fear marriage commitment, yet intertwine finances at a deep level, which is a far greater commitment. You should not mix any finances if you are not married. When you do, then have 50/50 split and clear contractual agreements in place. Really the only difficult part about getting a divorce is finances, so if you are mixing them, you are signing on to the hard part, without enjoying any benefits of marriage.

    2Reply
  • Tanya F.
    Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
    7y

    No, Joe.   Many reasons to not marry are not at all related to fear of commitment. Please don't pretend to explain other people's life choices. 

    1Reply
  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @James Marshall thank you. I have so much to learn. I’ve heard these terms over and over and am realizing only now that:

    (A) neither of us have low enough income for Home Possible and

    (B) the cash flow margins are tight enough (if possible at all) in Madison. The high FHA mortgage insurance and the fact that we can't cancel it without refinancing means it's probably not for us.

    All this said, if we are patient to find the right house, we should be able find 20% for the down payment. I wanted to put less down because I want to build equity through rental payments and I see this truly as a 15/30 year investment (think retirement), but the month-to-month margins are already tight enough.

    0Reply
  • Jim D.
    Investor · United States · Member since 2015 · 415 posts · 487 votes
    7y

    You may have already checked this, but try looking at your areas on this map. Some neighborhoods are exempt from the income limits on HomePossible loans. You can try different parts of your city to see what limits there are; looks like Madison as a whole has a limit of $91k.

    http://www.freddiemac.com/homepossible/eligibility.html

    0Reply
  • Case Stiglbauer
    OP
    Financial Advisor · Madison, WI · Member since 2019 · 11 posts · 1 vote
    7y

    @Tanya F. Thanks so much for your response. The brink next Wednesday sounds great.

    Your financial setup sounds very close to our other business. Though we have a single owned LLC that is just a pass through to my taxes.

    I think I’ve come full-circle to the point that I just need to get more comfortable with how rental agreements and insurance protect our personal assets. Thank you for your response.

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