Advice on how to structure a partnership deal on first BRRRR

4 Replies

Scenario:

My dad owns an old Victorian home free and clear in an up and coming neighborhood near downtown Milwaukee that is being revitalized after falling into blight for several years.

The property is a 5 bedroom 2 bath home currently valued at around $50k and needs about $50k worth of upgrades and renovations to bring it to an ARV of approx $150k.

Our idea is for me to finance the renovation using cash on hand, offering the renovated property for rent for $1150 per month and then refinancing to pull 70% of the ARV ($105k) essentially returning both of our investments while allowing the rent to cover the mortgage, cap ex and any other expenses associated with the property.

We are both investors in income properties that provide excellent cash flow in this market but for this property we are more interested in holding it for possible equity appreciation over the next 5-10 years.

In addition to adding me to the deed as co-owner is it necessary to create a separate LLC for this one property or is it enough to have it titled and deeded in both names with each of us named as surviving beneficiary along with setting up separate checking and credit accounts for accounting purposes?

I am sure that I am unaware of or forgetting important considerations as we try to set this up so I welcome any feedback or suggestions that you may have on how to execute this if this deal make sense. 

Donna Page

check out a Tenants in Common Agreement. I'm looking into it myself in order to avoid having to file for a whole new LLC. It's an expensive fee each year for a LLC where I live.

Full disclosure I've only begun to look into the Tenants in Common rather than an LLC thing myself so I'm no authority on the subject. Just throwing it out there as something for you to check out....

Nicholas Lohr

    @Donna Page thinking about your situation I am not so much worried about the legal side than I am about two very practical considerations:

    1.) However you structure it, make sure that it does not undermine your ability to do the re-fi later. As you probably know if you are not already recogniced by a lender as a commercial investor it might be difficult to get a loan on a property that is owned in an LLC. Also consider DTI, income and credit score of both of you when you make the decision. Maybe a good idea to speak with your lender up front.

    2.) I have always loved the idea to bring an old Victorian back to live! They are absolutley gorgous and full of amazing woodwork. With 5 bedrooms the property is probably around 2500 SF in size. Divide 50k by 2500 SF you end up with $20/SF. That is typically a light rehab, just a little better than paint and carpet. A full rehab is typically $35-50 a SF on a 1950s ranch. If you are planning to bring the home back in it's autentic architectural style you are probably looking at $60 or more per SF, which would be a 150k repair budget. I am concerned that you don't have the budget (that's fixable) and you don't have the ARV (that's a real problem!).

    Feel free to PM me the address, so I can give you a little more specific feedback.  

    Originally posted by @Marcus Auerbach :

    @Donna Page thinking about your situation I am not so much worried about the legal side than I am about two very practical considerations:

    1.) However you structure it, make sure that it does not undermine your ability to do the re-fi later. As you probably know if you are not already recogniced by a lender as a commercial investor it might be difficult to get a loan on a property that is owned in an LLC. Also consider DTI, income and credit score of both of you when you make the decision. Maybe a good idea to speak with your lender up front.

    2.) I have always loved the idea to bring an old Victorian back to live! They are absolutley gorgous and full of amazing woodwork. With 5 bedrooms the property is probably around 2500 SF in size. Divide 50k by 2500 SF you end up with $20/SF. That is typically a light rehab, just a little better than paint and carpet. A full rehab is typically $35-50 a SF on a 1950s ranch. If you are planning to bring the home back in it's autentic architectural style you are probably looking at $60 or more per SF, which would be a 150k repair budget. I am concerned that you don't have the budget (that's fixable) and you don't have the ARV (that's a real problem!).

    Feel free to PM me the address, so I can give you a little more specific feedback.  

    @Marcus Auerbach, thank you for this great feedback.  My dad has had a lot of the structural work completed already. The home was a parsonage for the church next door that he picked up for a steal and since acquiring it he has  had the foundation repaired, added new roof, new mechanicals, updated all of the plumbing and added the second bath. He also had the siding replaced and some of the fretwork redone but the contractor did not do a good job on that so that will most likely need to be addressed. 

    Most of the updates needed to make it attractive to rent are purely cosmetic, flooring, painting, light fixtures and new cabinetry in the kitchen. Right now the area does not justify a full remodel of the home to it’s former glory because it will not attract the type of tenants that can afford the costs associated with a $150K renovation.  I can certainly see doing so though once the the area has stabilized. 

    It had not occurred to me to speak with a lender prior to doing the renovation. That is very valuable advice. As a full time investor I derive most of my income from my rentals and have excellent credit, strong savings and positive cash flow but I do not have W2 income. My dad does have W2 income which will hopefully help us to qualify for favorable terms. 

    Donna Page

    Originally posted by @Nicholas Lohr :

    check out a Tenants in Common Agreement. I'm looking into it myself in order to avoid having to file for a whole new LLC. It's an expensive fee each year for a LLC where I live.

    Full disclosure I've only begun to look into the Tenants in Common rather than an LLC thing myself so I'm no authority on the subject. Just throwing it out there as something for you to check out....

     @Nicholas Lohr, Thank you for reminding me about the Tenants in Common Agreement. I will see if that is an option for what we are trying to accomplish. 

    Donna Page

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