How do you structure a partnership

[Cody Hunt]

I’m thinking about taking on a partner to buy a triplex/quad. We have wanted to do it together for a long time, he has a very similar strategy as me and we have never had issues agreeing on anything. I will be occupying one unit of the rental with some saved space (not a whole bedroom because it’s a one bedroom) for him whenever he wants/needs to come up to the area. I will take 100% of the calls and deal with the day to day issues faced by the landlord, while we both will contribute equally monetarily and with our labor on major renovations.In turn, we will be 50/50 partners. I plan to move out, freeing up the extra unit within 2 years and possibly continue to invest with him, but when I move out the split on the first property will still be 50/50, as he plans to move to the area into our second property with me when the time comes. We will want to save the revenue Incase of a vacancy/repair and to possibly use in the future to reinvest. How do we structure saving any of the revenue while I’m there as well as once I move out? How do we go about doing this? Do we have to start a partnership, do we just apply for the loan together? What might some of our options be? Thank you for any advice!

[Doug Shapiro]

Hi @Cody Hunt,

Here is one approach you can take:

1) You and your partner to both sign a tenants in common (TIC) agreement (you can find templates for this online) and to add in terms that are specific to you and your partner that are not covered in the boiler plate agreement.

2) Depending on lender requirements, you can both form LLCs separately, and then apply for a loan under the two LLCs. The LLCs would give you greater protection and anonymity and would allow you to do a 1031 exchange in the future and go your separate ways. If both of your names are on the deed and you want to sell and buy something else in the future, then you would have to buy with your partner for 1031 exchange purposes (which means that if you have a falling out with your partner then I doubt you'd want to invest in something else with them in the future). 

3) If you can't apply for a loan under two LLCs, then just apply for loan together (just make sure you trust your partner). If your partner just stops paying their share of the mortgage, then you would be in a difficult position. In the tenants in common agreement, you can have verbiage that specifies this situation, like "if party A is 30 days late on their half of the mortgage payment, then party B can make this payment and party A will lose 1% of their share of ownership until they pay party B back plus 20% interest". Something like that. 

4) Form a joint bank account so that you can both contribute equally to this account and then pay your mortgage directly from this account. Under this same account you can also get a credit card to only use for property expenses. 

Those are the main things I would do. The most important is really knowing your partner, because if the relationship sours, then you are stuck with that. In the TIC agreement you should also specify what happens if one party wants to sell their shares and the other one does not - there should be a buyout clause.

Hope that helps. 

[Dave Foster]

@Cody Hunt, For that size property you're going to be able to get a conforming FHA loan if you want. I agree with @Doug Shapiros, recommendation about TIC to facilitate ownership and potential sale and/or 1031 or dissolution of the partnership. But you'll want to check with lenders to see about qualifying/and structure.

[Cody Hunt]

@Doug Shapiro SO helpful! This will be a huge starting point for us and was so helpful! Thank you so much!