Buy and Hold Partnership question.

9 Replies

I'm trying to figure out how to structure this partnership. I found a great SFR buy and hold deal. My buddy is going to take out the loan in his name. I will manage the property. Do we set up a property specific LLC and buy the property under that? Buy it under his name and quit claim it to the LLC? Other options?

Any of those options will work.  

I think what you need to do is figure out to what capacity you both want to be involved.  Is he strictly a money partner?  If so, you may consider just pay him a nice return on his investment.  (I understand he is taking a loan out, but you could still pay him a monthly payment over and above his loan payment).  That way, only one person holds ownership (usually less complex)

The thing about partnerships is, you really need to have a strategy in place for when/if the partnership dissolves.  If not, things can get ugly.  Sometimes its just easier to not have an official entity partnership, but just a working business partnership where roles are defined and folks work together.  

Thanks for the reply Dave. He will be solely the money person and I will be paying him a monthly return. We're getting together today to have a good in-depth conversation about it. Im just trying to have as many ducks in a row before we meet.

I agree with Dave and from the sound of your follow-up reply, you've got things clear with your partner.  For your future consideration and for any others reading this post later, I cannot stress enough the importance of deciding an exit strategy for a real estate partnership while you are forming it, especially how you value the property and how you structure payments.   

If you won't accumulate any more properties or you aren't sure, you're probably fine keeping the property in your own name directly. If this is your first step on a longer journey to accumulate more properties, I'd go ahead and form an LLC.

Also, as a solid next step, go ahead and start thinking about bank accounts. Don't co-mingle funds from your personal accounts in your business accounts. This is important whether you use an LLC or not. You'll need a checking account and I'd recommend a Capital Improvements savings account. If you have the funds available when you close, try contributing 3% of the purchase price into the Capital Improvements account and 10% of rent. This probably sounds a little steep, but if you can be disciplined and hold to this practice it will greatly reduce cash flow headaches down the road.

Got it.  Since he will be getting institutional financing secured by real estate, odds are the bank will want his name/entity on the deed to the home. I will caution you, if the LLC is very young, the institution may not loan in that name (some banks are already funny about loaning to LLCs to any degree).

On the other hand, if he gets a non-mortgage loan (more difficult, as the bank wont have the security of the property), this allows much more flexibility for you.  Essentially an unsecured loan is what I mean here.  

First step for you is determine what type of financing he plans to obtain.  I would also make sure he's "bankable" so as not to waste your time.  You dont want to get knee deep into this deal, then find out he cant be funded.  

@Paul Lichtenauer Great question! Partnerships can get messy quickly without a written agreement upfront (detailing procedures when extra capital is needed, distributions for any tax due, etc). One item to be aware of if an LLC is formed and if you both have ownership there are additional tax filing requirements. You will file an extra return (Return of Partnership Income).

I strongly emphasize @Joe Hines  advice of separate bank accounts quickly as possible. 

It can be best to structure as a loan and decide later if a true equity partnership makes sense down the road. 

Best to discuss with a lawyer regarding entity formation and partnership agreements as I am not a lawyer:)

Originally posted by @Paul Lichtenauer :

I'm trying to figure out how to structure this partnership. I found a great SFR buy and hold deal. My buddy is going to take out the loan in his name. I will manage the property. Do we set up a property specific LLC and buy the property under that? Buy it under his name and quit claim it to the LLC? Other options?

You'd want to buy it in his name with a private agreement in place that is signed off by both of you. Don't quit claim it over to an LLC after the fact as that could trigger the bank's due on sale clause.

@Account Closed is correct: even the happiest of partnerships get very messy without clear, upfront documentation. Agree on everything ahead of time and get it in writing.

You could structure the deal in a number of ways. A venture-specific LLC is a great idea, and I've written recently for BP about how to protect yourself in these agreements. Many of the comments there about Operating Agreements also apply to Partnership Agreements.

One issue you may consider when deciding between these two approaches is whether you need financing. It's easier (and cheaper) to get financing in your own name than it is to convince a lender to make a loan to your LLC. This is particularly true if your LLC is new. Incidentally, I've written about how to get around the due-on-sale clause you'll find in most mortgages with a few strategic moves here on BP as well. I hope this information helps you out!

I would suggest do it on your own, or I would tell him to do it on his own. He could buy it and hire a property manager. Could be you, if you are licensed. I don't see any benefit in some kind of partepnership.

My idea of a partnership would be two or 10 or however many persons all putting in the same money(cash or borrowed) and then the partnership group buys properties and hires a property manager to manage. Each takes prorata income based on their financial investment. That is a partnership.