Starting a rental investment business

10 Replies

I want to go into the real estate business with my son. The idea is to buy a couple of rentals and then see how it goes. If we work together well and make money we might want to expand. My question is how do we go about structuring the business?

I have some capital, enough to finance the purchase of the first couple of properties, my son has none. Down the road if we want to borrow money, I would look a lot better on a loan app. than him. His credit is good, but he is young and does not have a high income. My son is a hard worker, very excited to do this, and I am sure will be putting a lot more time into this venture than I will. I don’t want to give him money, I want him to earn it, but I am certainly willing to take a bit more risk with him than I would with someone else, and he is quite trustworthy. I financed his first home and he repaid me never missing a payment and refinancing as soon as he could afford it. Long term I would like him to have a good business, but until I pass on he needs to earn his piece of it.

I see a lot of issues here from taxes to liabilities to who owns what, and I am a loss as to how to begin. I know how to buy and rent properties, but not how to set up the business. I have owned a few rentals over the years, but I have never taken on a partner or incorporated or anything so this is new to me. Any suggestions as to where to start would be much appreciated.

You technically don't have to do anything to structure the business. The two of you can go in to business legally as general partners with a handshake. The only thing you would have to do is file a DBA at the courthouse. Now this "default" structure provides no legal protection for you personally from your business liability. There are a couple different entity options, if you are looking to get some additional legal protection that way. Tax wise, different entities have different advantages and disadvantages depending on what you will be doing. If all you are looking to do is have a couple rentals then you might want to look into a Limited Liability Company (LLC). They are fairly simple to set up and will work well for what you are thinking about doing. It is a pass through entity in which whatever the company makes just passes through evenly to each of your personal taxes. If all you are looking for is liability protection, you might look into some type of general liability insurance policy. It will provide the legal protection, but doesn't require corporate filings and formalities like the legal entities do.

No matter what you do, I would HIGHLY recommend discussing the different options with a qualified attorney and a qualified accountant.

I have partnered with experienced family members in the business and my child who also worked hard, etc. etc. Many times when we visited a bank or mortgage broker they discouraged the loan application in both names for one reason or another.

If I sign the mortgage and provide the cash needed to get the property I would take the depreciation , taxes and interest writeoffs until the offspring has put money into repairs or lived in the property to make it a viable investment. When able, move the investment over to the offspring. That worked very well for us.

If it's experienced family members, whoever has the cash to make the deal work puts up the money, the other party might get the long term mortgage after rehabbing. In the end, both parties split the tax considerations and writeoffs and the risk. That has worked very well. There's a big difference in each type of partnership.

I am looking to start an investment firm myself but will be doing a few different things, primarily quick flips from distressed properties and then locking in rentals to produce monthly cash flow. I believe I will set up my business as a LLC, as it seems the way to go. Going incorporated just doesnt seem the right way to go, plus going LLC avoids being double taxed.

Now I have heard people that have their own investment firms is that they set up their entire company up as a LLC, but then set up each individual rental as a different LLC. They do this so that for legal purposes. For example, if you had all rentals under one LLC, then 1 tennant from 1 property could sue your entire LLC and put you at risking everything. Now if you have that property that the tennant resides in set up as an individual LLC than they can only sue your for that LLC and put that property at risk.

Now I am not sure if this is what everyone does, or if companies with 100+ rentals set these up like that. Then again when you are big enough and have enough money you can purchase large apartment complexes and sell off your small ones.

I was advised by a high priced tax attorney to set up llc's in accordance with the property type. Perhaps several old "girls" together, a new house separate--more by function than anything else. My real estate club had a lawyer speak to us recently and his opinion is when they sue, they're going sue you individually no matter how the property is structured.

You might want to put in your leases that moving furniture by tenant and guests (that includes parents) are at their "own risk". If they fall lugging some antique and break something...they look to your insurance to pay medical bills no matter whether they were too cheap and stupid to try and haul furniture they couldn't manage without injury. This did happen to us. It's a nightmare. Get liability insurance (umbrella policy). Talk to a good agent.

You said that they sue you individually, how is that possible if you have an LLC. I did not think that they could sue you, I thought that they had to sue your company. Even if they sued you, how could it go forward since the property is not owned by you, its owned by the LLC.

You need to discuss the topic of "entity piercing" with your attorney. The protection an LLC provides is not absolute and likely depends quite a bit upon state law and precedent (so what's true in one state may not be true in another). It's also my understanding that LLCs with just a handful of members (or worse yet, a single member) tend to be even higher-risk.

What's my attorney's opinion of LLCs? His firm is an LLC. His real estate company and management companies are both LLCs as well. He highly recommends having an operating agreement in place to avoid the possibility of a future judge piercing the corporate veil and coming after you personally. Having an LLC without an operating agreement is not wise. I am assured by him that I would need to be trying very hard to ruin myself or doing something illegal to be held personally liable.

I have been trying to set up a similar LLC but have been getting lost in the confusion of how to structure everything. Is there anyone that can recommend a CA RE Attorney?

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SUPER KUDOS!!! I have heard so many people go on and on about structuring properties individually in LC's as some guarantee, and you are the first I have ever heard speak of what I as well have said which comes from the best litigators, "entity piercing"! To put every individual property in it's own LLC makes it EASIER to have them all attached in a law suite case, because it looks like an avoidance tactic (which it is) and hence a judge can "pierce the vail" and attach them all into one whole. When properties are grouped by function and form into LLC's, it is near impossible to "pierce" because they stand in argument (check case law) that they are completely separate business entities, unique in form and function, hence not attachable. I know many will argue "but then you would loose all in that grouping", and yup, you will. The alternative is to have the law boys file suite to "pierce the vail", almost surely loose as others have, and have ALL attached. Thats just how the courts work.

As to Co. structure: I suggest forming a trust first. Then a LLC or Co. for the actuale operations of the investments, fund the Trust, which yourself (Dad) is chair of, and the trust owns the LLC and funds the LLC. That will resolve all issues with passing on the investments and investment company to the son when ready. It is like double wrapping a company, and affords many protections. OJ for example, lost the lawsuite big time, but kept the home and cars and rich life, because OJ himself was broke, but the OJ trust was loaded, which he ran, and was receiving privileges in.

Get with a good CPA and legal eagle, they can advise you, but a trust offers the #1 setup for surveivorship/ passing along family lines. You can even choose who runs what, and how all funds are handled after passing. Even how the LLC owned by the trust is handled, has the trust owns majority share, etc etc.

I would use a trust. Give him part of the benificial interest in the trust. As for qualifing, the bank will quickly tell you who is gonna sign the note. You will always have to sign personally, just move it into a blind land trust post closing. Good luck. :mrgreen:

P.S. You are a cool dad to help your son out. I am sure he appreciates it.