I have decided to switch the the BRRR model. I have 2 investors who plan to do this with me for a minimum of 5 years. I have some questions how others have done this with the following:
Do I create an LLC to outline who owns what percentage of each house?
If I do, I have been told by lenders I cannot get a conventional cash out loan using an LLC. How have others done this?
Taxes: If I don't create an LLC, how do I make sure that I'm not paying taxes on the percentages owned by my investor?
For example: I own 60%, investors own 20% each. I don't want to pay 100% of the taxes owed on each property.
OF course I plan to consult with my attorney and accountant, I just wanted to see what those who employ the BRRR method do.
@Gina Shumway you don't HAVE to create a LLC. That's not a requirement of the BRRRR method. However, I would encourage to create an LLC because you have a partnership with other parties. And for the tax reason's you listed (and other reasons as well) you'll want to have the entity in place. Now, it is true that you cannot receive a "conforming" or "conventional" loan with an LLC (and I'm defining conventional as a loan that comes from Fannie Mae and Freddie Mac). But there are plenty of OTHER loan types that you can get - commercial, DSCR, Bank Statement, etc. The loans are slightly different on that side of things but that's 100% the right way to go. Let us know if you have any other questions! Thanks!
Lender Texas (#392627)
@Gina Shumway You create a LLC for each property and include the investors as a member. You create a operating agreement which dictates the division of expenses or contributions or any other issue germane to your partnership. Than you file a partnership return(for the LLC) with your income tax return which divides the profits and losses between the partners in their respective shares. Many DSCR lenders will not require every member of the LLC to be a guarantor. The member with the highest mid-score can be the guarantor which may allow you to obtain a better rate. A good broker can do deal analysis and may be able to suggest the best way to structure your LLC or, give you the name of lawyer who can. After you have the first operating agreement you can use it together with the first LLC as a template for all future deals.