Real Estate Investing With Friends

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Real Estate Investing With Friends

Jon Kim
Member since 2024 · 1 post · 4 votes

Hi all, 

New to the group, but happy to be here! 

Hoping for some advice - I'm trying to buy some real estate property out of state with 2 other friends (3 in total) and we're having a hard time figuring out the exact order to get going. 

1. Should we create an LLC to start? If so, does it matter if it's in the state we're trying to buy property in?

2. If we do create an LLC, it looks like we get worse rates than if we buy through a personal loan. This would ruin any of our chances to take advantage of a 'first-time home buyer' program, correct?

3. Any other general advice is greatly appreciated! 

Thanks in advance,

JK

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Samuel DioufBusiness Member
Real Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
1y

Welcome to Bigger Pockets Jon Kim!

Bigger Pockets is a great place to learn and connect with fellow investors.

To answer your questions...

1. I wouldn't create an LLC when just starting out. I would focus on securing a deal, figuring out what type of financing you want to use, then go forward from there. Buying with an LLC limits your financing options when you're starting out.

2. This is correct.

3. If you’re looking to invest long distance, I definitely recommend building your core-4 team. This team consists of an Investor Focused Agent, Lender, Contractor, and PM.

Read this article on the "core 4". It explains the team that you should develop to have a strong foundation under you while investing remotely.

https://www.biggerpockets.com/blog/core-four-real-estate-team


What market are you looking to invest in? 

[email protected]614-662-1652
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  • Bradley BuxtonBusiness Member
    Real Estate Agent · NV · Member since 2023 · 1k+ posts · 710 votes
    1y

    @Jon Kim

    Create the structure of the partnership. Who is doing what and what to do if something goes wrong. From there you can decide how to structure the LLC or limited partnership.

    0Reply
  • Nick HarringtonBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2019 · 31 posts · 28 votes
    1y

    Hey Jon, have to give you my two cents on this year! I am a realtor in Milwaukee that specializes in working with investors, and I also have a portfolio of rental properties myself.

    I will get to your questions, but here is some background regarding loans and in general. 

    - If you are NOT buying the property as your primary residence (in this case, it sounds like it will be an out of state rental), you are looking at putting 20% - 25% down if you are going to use a conventional mortgage. First time home buyer programs (FHA, LoanPossible) or even low down payment options (5% down with a conventional loan) are all limited to owner occupants.

    - You CAN NOT use a conventional mortgage to purchase a property with an LLC. Conventional mortgages are designed for individuals to purchase homes, not for businesses. If you want to acquire the property and have it deeded directly into the LLC, you are looking at either purchasing it with cash, a commercial loan, a DSCR loan, or hard money.

    So now you are probably wondering how does anyone buy a property with an LLC and use a conventional mortgage? 

    The answer is they buy it in their personal name, their mortgage is in their personal name, and then upon closing / taking title of the property, they "quite claim" deed transfer the property from themselves to their LLC. 

    Now, the LLC is the owner of the property. The mortgage will stay in the name in which the home was originally purchased. 

    Without going down too big of a rabbit hole, some lenders may require the loan to be paid due in full upon the transfer of ownership. Of all the lenders I know who have clients that do this (purchase in personal name and quit claim to LLC), none have ever had that happen - the main thing is to make sure you just keep paying your mortgage, and this would be a good conversation to have with a lender. 

    As to should you create an LLC - the answer here comes down to mitigating risk. The whole purpose of the LLC is to mitigate risk and to separate yourself from the property through the LLC. In the case of having several partners in the property, it also would outline an operating agreement and arrangement between the partners of who owns how much of the property. 

    An umbrella insurance policy may get you guys the same result here as well. 

    As for which state to create the LLC in, I will need to defer on that one. For my properties in LLC's, I have the LLC state as the state the property is in. 

    [email protected]414-335-0823
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    1Reply
  • Shafi Noss
    Lender · Nationwide · Member since 2018 · 571 posts · 310 votes
    1y
    Quote from @Jon Kim:

    Hi all, 

    New to the group, but happy to be here! 

    Hoping for some advice - I'm trying to buy some real estate property out of state with 2 other friends (3 in total) and we're having a hard time figuring out the exact order to get going. 

    1. Should we create an LLC to start? If so, does it matter if it's in the state we're trying to buy property in?

    2. If we do create an LLC, it looks like we get worse rates than if we buy through a personal loan. This would ruin any of our chances to take advantage of a 'first-time home buyer' program, correct?

    3. Any other general advice is greatly appreciated! 

    Thanks in advance,

    JK

    You can share ownership with friends by holding title through an LLC, a 'tenants in common' structure, or 'joint tenancy' structure. Look those up and see which you prefer. 

    If you go the LLC route, the state you chose depends on the states you're looking at. More detail would help. 
    1Reply
  • Samuel DioufBusiness Member
    Real Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
    1y

    Welcome to Bigger Pockets Jon Kim!

    Bigger Pockets is a great place to learn and connect with fellow investors.

    To answer your questions...

    1. I wouldn't create an LLC when just starting out. I would focus on securing a deal, figuring out what type of financing you want to use, then go forward from there. Buying with an LLC limits your financing options when you're starting out.

    2. This is correct.

    3. If you’re looking to invest long distance, I definitely recommend building your core-4 team. This team consists of an Investor Focused Agent, Lender, Contractor, and PM.

    Read this article on the "core 4". It explains the team that you should develop to have a strong foundation under you while investing remotely.

    https://www.biggerpockets.com/blog/core-four-real-estate-team


    What market are you looking to invest in? 

    [email protected]614-662-1652
    Reafco - Samuel Diouf528 Reviews
    WebsiteView Page
    1Reply
  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    1y

    2. Any investment property is going to have higher rates. Typically, first time buyer programs are saved for those who are going to occupy the property, not investors.

    [email protected]239-339-3969
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    0Reply
  • Rebecca KnoxBusiness Member
    Specialist · Milwaukee, WI · Member since 2014 · 1k+ posts · 1k+ votes
    1y

    If it were me, I would definitely create a clear operating agreement...especially with friends. 

    Forecast every possibility that could go wrong....I'd consult with a very good attorney and an accountant who specializes in real estate investment as they normally have seen every scenario possible. 

    Captain Save-A-Home LLC
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    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    Don't invest with "friends". You'll go in as friends, leave in a completely different spot.

    1Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    1y

    @Jon Kim No matter what entity you decide to invest with please be sure to have 1-3 exit strategies outlined in your partnership/LLC agreement to make sure you know how you're going to handle a situation when 1 or more of you wants out.

    I failed to do this twice and ended up in court both times.

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Jon Kim

    Investing with friends can work well if structured properly. Forming an LLC offers liability protection and clarifies ownership, but it's usually best to establish it in the state where you're buying property to avoid tax complications.

    However, LLC financing often comes with higher interest rates and would disqualify you from first-time homebuyer programs, which require personal ownership. You could consider purchasing in your name first and transferring to an LLC later as there wouldn't be income tax tax implications.

    Make sure to draft a solid operating agreement covering decision-making and profit distribution.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    1y

    The best way to destroy a relationship is to partner together for business. When things go south, you'll lose the business and the relationship.

    If you decide to move forward, I recommend you talk to an attorney and develop a strong partnership agreement that protects all parties, gives everyone a way to exit, etc.

    The DIY Landlord Book4.7248 Reviews
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    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    1y

    You need the following for a successful partnership - Money/Capital, Experience and Time.
    What do you bring to the table?
    What do your friends bring to the table?

    Do any of the friends have experience in real estate?
    If none of you do, your goal should be to connect with someone who does have experience.
    Otherwise, it is the blind leading the blind.

    [email protected]917-280-8544
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    0Reply
  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    1y

    Don't do it with your friends. If you must do this, then take a ton of time deciding what everyone will do in the business then get an attorney to draft the operating agreement. LLC is a must.

    0Reply
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