Washington State - What's your preferred partnership setup?

12 Replies

Investors of Washington State! How do you prefer to setup partnerships for your investments -- is it through an LLC, LP, or something completely different? Are there some unique state laws and regs that make one kind preferable to another?

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There are a lot of variables that are not know here to advise, you should make the investment to consult with an attorney now as it will save you more money in the end, but setting things up properly in the beginning, especially if you are working with a partner. 

@Wes S. From a financing stand point, if you want Fannie Mae / Freddie Mac financing to get the best terms and rates, then you need to buy or hold the properties in your personal name. If you do that, I would suggest that you max. out the liability coverage on your landlord policy and follow it up with an umbrella for 1-5 million. 

If you decide to hold or buy them in an entity, you will be forced to finance them through a portfolio or commercial loan. In that case, your best bet is to call all the local community banks and see what their portfolio/commercial terms are? I would also try some credit unions as well.

I would still recommend that you max. out the liability coverage's on the polices, depending on the insurance company though, they may allow you to have a personal lines policy or some may force you into commercial. Shop around there as well. 

Good luck, happy investing!!! 

Thanks for the insight! When it comes to working with a partner though, is it common to do that through some kind of Limited Partnership, or simply by means of a contract? And are there any Washington State specific concerns when it comes to this?

@Kevin R. has a good point about the financing, so you would need to chase that to ground, but all other things considered, I would do it in an LLC every time. The insurance policies don't discourage frivolous lawsuits the way a properly set-up legal structure can. The point of having a good legal structure (IMO), is to provide the best tax benefits, and the best legal protection, but you SHOULD be doing the setup work with an attorney. I recommend Anderson Business Advisors, but I'm sure there are others who are "on the level" (not all attorneys are!).

I've done it in three ways for flips:

1. LLC - both partners would be on title

2. JV Agreement - one or both partners can be on title (in their separate names/entities)

3.  Promissory Note & Deed of Trust - the capital partner can just have a lien against the property, while the other partner is on title.  You can state the return the capital partner will get in the Promissory Note (even a percentage profit split).  Note that some hard money lenders don't like having junior lienholders.

@Nghi Le That's great, exactly what I was wondering. From a nuts-and-bolts perspective, how do you pay out your partners? Just in a monthly transfer from your bank account?

Originally posted by @Wes S. :

@Nghi Le That's great, exactly what I was wondering. From a nuts-and-bolts perspective, how do you pay out your partners? Just in a monthly transfer from your bank account?

That sounds more like a lender than a partner.  For my private lenders, I just pay at the end of the loan term or when the project is completed, depending on how it's structured.  I haven't done any monthly payments in the past couple of years.

We have an LLC with all my family as the members since WA has no age minimums for members.

Because our 2 boys can own 2% each, it keeps my wife and I from owning 50% each safely.  

If you sell less than 50% in any calendar year - no excise tax.  

We are set up to sell our commercial LLC properties excise tax-free if done right.

LLC membership also educates kids about business ownership. My 12 year old has owned apt buildings since he was 1 week old. Their k-1 income flows directly into mutual funds, teaching them about investing. I've been able to pull them out of school to go to closings. Pretty cool!

@Steve Vaughan You just blew my mind with that family LLC idea! I've got a huge lightbulb over my head right now, it sounds like a perfect setup for my family too

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