How should my friend and I start our rental property business?

Question

Total newb here. My best friend and I want to partner together to start a rental property business. I live in Georgia and he lives in El Paso, TX. I used to live there for a long time so I have a good understanding of the city. Our plan is to start our business/investment there. We both are going to bring $50k to the table from what we both have been saving.

My question for you more experienced folks out there, how would you initially begin this. I thought going in that we would start an LLC but have come to learn that LLC's have very limited lending options for real estate and that our LLC would require us to file taxes as a business because there are 2 of us. What do ya'll think would be the right way to go here?

Marcus Auerbach · Answer

Don't do it Justin. I would never.

Almost every partnership I have ever seen turned sour at some point. Worst case in court. The only type of partnerships that make sense are between people that bring different skillsets to the table, but even then: have a written agreement and a clearly defined (!) exit strategy.

Instead: work together to each buy your own peroperty in your own name. This way you have the support and accountability from a partner without the legal implications.

Nathan Williams · Answer

House hack to start. It's the best way!

Honestly, becoming a big time BRRRR investor out of the gate is damn near impossible if you ask me. Definitely have to work up to that level. That's why mentorship programs are largely BS. You need a level of knowledge and experience to overcome all the hurdles that present themselves throughout the course of a deal.

-Contractors not performing, low appraisal, unforeseen renovations, finding a deal that works, offering the right price based on financing and timeline, materials selection, contractor management, contractor vetting and selection, contractors contractors contractors...

This is not an easy game to buy and hold multiple units. House hacking is pretty easy though! I would start there!

Basit Siddiqi · Answer

If you and your friend have zero experience, stop and invest separately.You need three things for a successful partnership - Money, Time and Experience.If neither of you bring experience, the deal will struggle.partnering with a best friend sounds great on paper but what you need to do is partner with somoene with more experience.

Brian Burds · Answer

Hi there,

Firstly, congrats on taking the exciting step towards starting a rental property business! It sounds like you and your best friend have a solid plan in place and are eager to get started.

Regarding your question about structuring your business, you're correct that forming an LLC is a common route for real estate ventures due to liability protection it offers. However, it's also true that financing options can be more limited for LLCs, especially when it's a new entity.

One alternative worth considering is forming a partnership agreement between you and your friend. This would allow you to retain the benefits of a partnership while potentially offering more flexibility in financing options compared to an LLC. In a partnership, you'd still have liability protection, and you wouldn't have the additional tax complexities that come with operating as a separate business entity.

Before making any decisions, it's crucial to consult with a legal and financial advisor who can provide personalized guidance based on your specific circumstances. They can help you weigh the pros and cons of each option and determine the best structure for your rental property business.

Best of luck with your venture!

Nicholas L. · Answer

@Justin Louis

so you want to BRRRR?

no need to buy "debt free"

and no need to sign up for a lifetime partnership

buy 1, buy with debt - fix up - refinance

that is BRRRR

if you have construction experience, great!

what am i missing?

Preston Dean · Answer

Just both of you be on the deed & bring your funds together. One be the barrower and the other be the co-barrower here. You don't necessarily need an LLC to do this initially.

Purchase the property outside of the LLC and then turn it over to the LLC after purchase.

Tanner Lewis · Answer

Regarding taxes, I believe LLCs are pass-through entities, and you will just claim the income on your personal tax returns. I would reach out to a CPA to confirm this.

For lending, yes, you will be limited when it comes to conventional lending, as those loan products are made for owner-occupied properties. However, DSCR loans have just become a thing in the last three years. They allow you to take out a loan in an LLC and qualify based on the property's income rather than the DTI (debt-to-income ratio). DSCR loans are essentially investor-friendly versions of conventional loans.

For entity structuring for asset protection, I see most borrowers have the following structure: a Wyoming LLC owning an LLC in the state of the property. So if Texas: Wyoming LLC owns a Texas LLC. This gives you the anonymity and tax benefits of a Wyoming LLC, and the asset protections of a same-state LLC. This is how I am structuring my entities with my partner at the moment.

Jonathan Greene · Answer

I agree with @Marcus Auerbach. If you are investing the same amount of money and they are in the location you are investing in, that's a recipe for inequality of effort. They will be the boots and eyes so eventually will require more return.

If you are both newbs, this is a disaster waiting to happen, to pool money on something neither of you know how to do.

What are you planning to do with 100k? Forget taxes and LLCs, what do you think you can get done with 100k in this market in El Paso and what's the scale on it.

I would spend more time masterminding together and lifting each other up and learning without partnering.

How should my friend and I start our rental property business?

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