Partnership arrangement questions

6 Replies

Happy Sunday BP, I have some questions about about partnerships. What legal steps do I have to take to form a partnership in terms of financing. I want to invest in SFH. What would be a good partnership arrangement?

@David Minaya

Make sure you and your partner(s) are clear on your goals and rolls. Then go out and find a solid CPA and attorney as anchors of your team. They will guide you down the path which aligns with your goals.

@David Minaya

You should consult an attorney to draft up the partnership agreement. Typical items to include in a partnership agreement include
1) How income, losses will be allocated to each partner
2) What would happen after the result of an unforeseen event(ex. death of a partner)
3) how/when the partnership will disolve
4) Who will manage the partnership

Once you have the partnership set up - the partnership will not be eligible for conventional financing. You will need to speak with portfolio lenders/commercial lenders to get financing.

I see you're in CA.  Let Katie (or someone else who takes the time to ask you all the necessary questions) be your definitive answer, but in general...

1. Decide what type of entity you'll be. Very practical differences between two people forming a general partnership, limited partnership (unlikely), or LLC (most likely) for this type of thing. For simplicity, I'll assume you end up with a general partnership.

2. File the paperwork with the Secretary of State.

3. Open a bank account.

4. Buy something.

There's 1000+ details omitted there for brevity, but to your question about "legal steps in terms of financing" that's the general answer.  If you're buying high value residential property locally, note that you'll probably want financing in your personal name(s) as a practical matter.  I made the mistake earlier of choosing a structure first, then trying to fit what I was doing into it - no bueno.  You kinda gotta know what you're going to do (hold short or long term?  how will title be held?  which partner(s) will assume liability?  what location will your investments be in?  what is each partner's tax situation?) before getting too far down the road.

@David Minaya

Several things to consider, as all my colleagues here so kindly pointed out. Depends on how many investors you have and what type of entity you want to create. An LLC or LP will give you better liability protection, but also will require an $800/year fee to CA versus a GP will not, but doesn't cover your liability as much. Might depend on what other assets you have and your estate plan too, and your risk tolerance. You will need to have a partnership/operating agreement and will need to file several documents with the state. If you're dealing with rental property, it's worth consulting with an attorney to have everything done correctly. I'm in downtown San Diego if you have questions.

@David Minaya a word of caution: I have some clients who formed a partnership (multi-member LLC) and are now second guessing the wisdom of that move. They paid cash for a property (SFH) and titled it to their LLC. Now they are having trouble finding a lender who will loan money against the property because the LLC has no financial history.

Then they got to pay me to file a 1065 for them. My prices are good, but I can't work for free. The 1065 didn't do much for them except satisfy a check in the box for the filing requirement because they formed (and operated) a multi-member LLC, which is (by default) a partnership under federal tax law.

You can share profits and expenses on rental properties without forming a partnership. You and your other investors can avoid the 1065 filing requirement and just split income and expenses on your schedule E(s) for your individual return(s).

You may have very good reasons for forming a partnership. Just make sure that is the right way to go before you jump in.

Best of Luck with Your Real Estate Investing.

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