How to structure a non-partnership deal

Question

I want to purchase a STR with family members as a second home so I can put 10% down. They want a place to park their money and see some appreciation and return, and I want to use it as a way to offset my w-2 taxes which my CPA has advised is the best way at this point. So I'm curious how best to structure a purchase deal that isn't a partnership but instead something with debt or equity.

Mike Smith · Answer

@Ben Lockspeiser I won't comment on the mortgage aspect, as it seems others already have covered that area.

When setting up the structure, it's important to treat it as a normal business deal, not something different because it's between family.  Treating it differently always ends up with someone having hard feelings later.

1. Debt - they loan you X dollars and you pay them a reasonable interest rate.  Also, they should have first position (or second position) security in the property, just like normal lender, with a Deed of Trust.  The more risk they have, the higher the interest rate that should be paid.

2. Equity - you should be paid the going rate for all your labor (property management, cleaning, etc).  You decide on a split of profits (gross revenue less all expenses, which include your labor at the going rate).  In this scenario, if they are putting up most of the money, and assuming most of the risk, the profit split should be something like 75% them, 25% you.  However, you still make the property management money, cleaning, etc.

I would highly advise against "oh, it's just family, nobody really cares about the money that much" attitude.  Treat it as a business deal with signed agreements, clear expectations, acknowledgements of risk, etc.

Business deals gone bad really suck.  Business deals gone bad with family result in awkward holidays for the rest of your life...

Ben Lockspeiser · Answer

@Mike Smith thanks, that's exactly what I was looking for. I 100% plan on going into this like a normal business deal without the idea of, "o, it's family, we'll figure it out later", I just haven't thought of what a normal business deal would look like. Thanks for these examples, time to put a few together and meet with the group.

Jason Regan · Answer

I am not a loan officer or lawyer but I have seen this before.  You close on the home then have the deed changed after to reflect the second owner.  I did it on my 2 family to get my wife on i before the 1031 exchange.  Also be careful if you are the only one on it they can only "gift"  you so much money.  Ensure you talk to your loan officer and fully understand those loopholes

Ben Lockspeiser · Answer

Thanks for that John, I would use it as a vacation home and a STR. Sounds like I would still need to get that reviewed by a lender.

How to structure a non-partnership deal

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