How to Use a Money Partner Without Being a Co-Borrower

Question

BP,

I am trying to finance a 4-unit deal using a money partner who will provide the down payment and closing costs for the purchase in return for 50% of the cash flow and 50% of the equity.  I will secure the financing and manage the all of the operations for the property for the other half of the equity & cash flow.  The problem is that I found out, after I  had already filled out the mortgage application (for conventional loan), the bank wants to add my partner as a co-borrower since I don't have the funds, which is going to be a deal-breaker.  My partner already has a large amount of mortgage debt from other investment properties and does not want to incur any more.  He only wants to be a silent partner who infuses the initial purchase capital.

My thoughts were to open a joint account where both of us are required to sign prior to any withdrawals and use that on the new mortgage application.  We also want to setup something like a partnership agreement/entity (LP, LLC, or otherwise) so that we can clearly outline the details of how we will operate and conduct business.  I know it's difficult to do conventional financing with an LLC, so I was hoping to get the financing in my name and use the LP/LLC to manage the business side of the property.

What is the best course of action to accomplish both?

Akhil Kumar · Answer

Totally right on.

Get the loan in your name. No need to have the partner on the loan. Check out credit unions, community banks. It's a matter to keep dialing until you find someone you will lend to you.

Since you have a partner, create a LLC. Yes, it costs a bit more. But you'll limit your liability and sleep better. And create a bank account in the name of LLC and do all transactions in that bank account only.

Create an operating agreement when you create the LLC, where you specify the 50% cash and equity arrangement. That makes the agreement legal and enforceable.

Good luck !

William Hochstedler · Answer

If it were me and if you have time, I'd move the down payment into your account to start the seasoning.  Ask your lender about whether this can be a joint account.

Then close with you and your partner as tenants in common but you as the sole borrower.

You can simply deed the property to an LLC at any time in the future if that's the path you want to take.  Talk to an accountant about how much a separate filing for the LLC will cost on an annual basis.  And of course, ask your attorney how much it will cost for the formation.  It often doesn't make sense for this size property because it will substantially eat into your cash flow.  If, on the other hand, you plan to do a bunch of deals with your partner, it might be a great idea.

The reason for this is that, on a fourplex, you can get a 1-4 unit conforming 30 year fixed loan.  Right now interest rates are very good.  You won't be able to get these terms in a commercial loan.  Because of the lower and fixed interest rates, it could save you as much as $100,000 over the life of the loan.

Stephanie P. · Answer

If you want to go conventional, put the money in your bank account for 60 days to season it and then buy the house.  Work out the partnership deal separately.  Doing an LLC like this won't give you much protection anyway, so I wouldn't bother.   The LLC will only give you protection for the amount of money you put into the LLC, so it's not going to help you very much.  I'm no attorney, but I've set up LLC's and researched them before.  The other posters are correct that you should go to a local lender if you're going to try the LLC route though.

If you're really wanting to go the LLC route, draw up the corporate documents, open a corporate account, deposit the money in the account and then run all of the transactions through the LLC account.  There are loan products out there that cater to investors/LLC's and buy and hold situations where even new corporations are acceptable (without tax returns or income from the respective borrowers).  PM me for more information.

Stephanie

Akhil Kumar · Answer

One thing I want to add is: be upfront with the lender that you'll take a loan in your name, but would like to get the title in the name of LLC at closing or after closing. Most investor friendly lenders will be ok with that. If they are not, don't deal with them, look elsewhere. But get on the same page with bank before getting a loan that you want to retitle to a LLC in future. If you get caught in such a scenario and bank won't allow it, they can trigger a Due on sale clause when you change title owners and demand immediate repayment of the loan. It does not usually happen, but could.

Moral: stay away from such lenders in the first place.

William Hochstedler · Answer

I'm surprised your lender isn't giving you more guidance on this.

You are kind of talking about two different things here: 1) How to use your partners cash for the down payment and 2) how to structure the ongoing relationship.  Due to the rigid guidelines for sourcing and seasoning down payments these may have to be separate discussions.

I'm guessing that the cash for the down payment will have to sit in a bank you control for at least a month.

LLC's are very good ways to manage partnerships but cost money to form and maintain.  It may not make sense for your situation.  Many people just take title as tenants in common with good insurance.  You may be able to use a joint bank account for this.  A separate bank account is a good idea regardless.

So, talk to your lender about where the cash has to be and for how long so you can use it as the sole borrower.

Talk to an attorney about whether your net worths justify the added time and expense of a LLC.  You can move the property into an LLC at any point in the future and you are right that it will only complicate the loan.

Joseph Gozlan · Answer

smarter people than me will probably have more insights but I think it'll be really challenging to get a conventional loan.

Try hitting some local/regional banks and credit unions. They will have more room to maneuver around these requirements.

William Reed · Answer

@Stephanie Potter

Thank you.  I will definitely PM you to get more info about how to get financing for an LLC.  My partner is hard-set on using an LLC for our deals, so I'm working to accommodate that.  I understand that because we are leveraging, we are not going to be a big target for law suits.  However, as we grow, I think this will provide a solid foundation to provide the protection we're looking for long term.

I'll be working with a local business attorney to assist with properly structuring the LLC to our investing objectives.  We'll also be opening a business account to handle all of the transactions associated with the property.

William Reed · Answer

@Akhil Kumar,

Thank you.  My partner only wants to operate & purchase properties via LLC, so that is the route I must take on this deal.  I'm putting all of this up front from now on with the local lending institutions to avoid the run around in the future.  I've found at least one that will allow the LLC, but only through a commercial loan.  I'll be engaging them further on the details so that my partner doesn't get looked at as a borrower.  I believe that if he has less than 20% ownership of the LLC then he isn't considered a co-borrower and I'll be the only one on the loan application.

I'll definitely be meeting with a local business attorney to get the LLC & operating agreement structured properly to fit our investing objectives.

William Reed · Answer

@William Hochstedler,

Thank you.  I know I kinda combined two different threads into one - it seemed that the LLC part of the equation was affecting the method of financing.  The lender did get back to me and told me that there would be a 45 day seasoning requirement for the funds supplied by my partner, but they wouldn't be able to title the property to the LLC.  I figured since it was a credit union that it would be a little more flexible, but I was wrong.

I found a potential lender (a saving & loan) that could do it on the commercial side - working out the details now. I'll also be speaking to some local business attorneys about how we should structure the LLC for this and future purchases.

JR T. · Answer

You need to either come up with the cash or find a replacement to step into your position who can perform so your existing partner can realize his expected return.

I feel strongly (and you may not) that as the nonperforming party you owe a duty to your partner to move heaven and earth to fix this, even if the end result is you are out of this deal.

How to Use a Money Partner Without Being a Co-Borrower

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