Structuring a BRRRR Partnership

1 Reply

My husband and I are under contract with another couple on our first BRRRR. I've set appointments with a RE attorney, CPA and then have plans to do my research with insurance companies and lenders but wanted advice from the BP community on how best to structure our partnership since I know many of you have to have already been down this path.

Our goal is to purchase in cash ($120k) rehab ($40k max) and then do a cash out refi for 75% of the $225k ARV, so pulling out around $168k. Priorities include both couples needing to protect ourselves and our other financial assets, getting the best financing rate when we do the cash out refi, and being able to take advantage of tax strategies that the RE investment will offer us.

Questions:

1. LLC works great for ownership structure, but the financing is a grey area. I had a lender flat out tell me that they would look the other way if we did the refinance through one party, and then put the property into a LLC. They did raise that it could cause issues with insurance, ex: if the property burns to the ground, where will the payout go? Likely the one party on the mortgage and not the LLC. Seems like if this was an issue it could be solved through an attorney and structuring the operating agreement saying that insurance payouts go to both parties.

2. I want to lower our w2 income through RE investments/pass through which I understand I need an LLC for, but I don't want to pay the commercial loan rate when we refi. Am I looking for a unicorn solution or is there a way to have the best of both worlds?

3. I keep seeing people say LLC usually doesn't provide the protection that everyone says it does, is umbrella insurance really a better deal? I feel like for people with multiple properties, which both parties have, umbrella could be the way to go, but then I worry we forefit the tax benefits of a LLC.

Is there anything else we should consider? 

I know this is all likely in the forums which I have skimmed, but hoping for some quick advice given we are already in our due diligence and I have calls with CPA, attorney etc quickly approaching. 

@Mallory Thompson

When you are doing a deal between non-spouses, or in your case two pairs of spouses, you kinda pretty need a business entity to protect yourselves. You could investigate holding Title as Tenancy in Common or something, but I'm not entirely up to speed on it.

The legal entity not only provides asset protection (at some level), but it also allows for profits/losses to be allocated legally/cleanly. I personally think you need to "bite the bullet" and just deal with commercial financing. I hear some places are doing 30yr terms. 4%-5% interest rates is still really low...

Using insurance is a fine way to go as well. But, your issue is how you two pairs hold Title. Also, you mention "forefit the tax benefit of a LLC." LLC's really only provide asset protection, not tax benefits. Whether you hold Title to a rental personally or by a LLC, your taxes are really the same. Either way you make the same deductions on a SchE basis. What I said above about allocating profits/losses is exactly that. Now that you have multiple people involved, who gets to report the profit/loss? The business entity provides a way to do that. When a single person or a spousal couple owns a rental, they just report it on their tax return. They don't have to worry about splitting it up like the two pairs of you have to.

There is a bunch of stuff going on here.  Feel free to direct message to setup a time to chat.  I hope this helps.  Good luck.