How? Turn a rental property that I own into an LLC with partner?

Question

Hello, I have a rental property that I have owned for over 8 years that has a tenant in it and producing well into an LLC?

I have a friend and business partner that wants to get into real estate and I suggested he just buy into my existing property and he said yes. But now what are the steps.

How do I sell this property to an LLC that I will own with my partner?

Please help if anyone has done something like this before or know the steps I need to take in order to make it happen.

Thank you in advance for any advice.

Bill Gulley · Answer

First question, do you have a mortgage on it? If you intend to partner on several properties, form a new LLC. Taxes depend on the % sold, sell a half interest and you'll have 50% of the tax liability, sell it all you can have all the tax liabilities.50% ownership for taxes isn't the best, 49/51% has advantages, see a CPA. A TIC can be used, you may hold it as Tenants in Common, and that probably should be the deed used. You use a TIC Agreement to spell out the agreed terms, that will need to match your Operating Agreement if you use an LLC.Between the two of you, you should be able to get local (Ohio) legal advice! No, you can't just do anything you agree to, nor should you try to devise your own equity sharing partnership without legal advice, the tax side isn't so complicated but the "partnership" is. :)

Steve Vaughan · Answer

If you want to help someone get into RE, I'd do it with a new property. Adding someone in after 8 years I fear will be trouble in multiple ways, especially tax-wise. If I were in CA with the $800 annual LLC fee (and quarterly reporting requirements?), I'd probably buy a residential property as TIC with % listed and a JV agreement. Be much easier. Act above board and carry good insurance.A tax person hopefully will chime in on your after 8 years situation. Say you sell in 3 years. The first 8 years of depreciation recapture are yours, the remainder are half (or whatever %) thiers and their capital contribution was x when the property value was y, but we sold for z and who owes/gets what? Anyway - good luck. I'd avoid an entity in CA with little houses. I don't bother in WA, either. Wait until you are in the commercial apt space with 5+ units.

Bretney Lindley · Answer

in that case its a great deal for a silent partner

Steve Vaughan · Answer

@Vid Cotarta - I'm not a tax guy, but it seems to me that you could sell it to a TIC with you and your new partner. @steven hamilton II would be great at helping answer the tax-side of this. @Bill Gulley has written extensively on TICs. He is an educator and I believe he has a blog as well. Maybe he will have time to chime in.Overall, it all makes much more sense now what you are trying to do. I love the creativity of it, just make sure you involve competent legal and tax help, of course. Please keep us posted!

Oren K. · Answer

Vid,That's quite the deal he is agreeing to; he puts up all the money, you pocket some profit and get 50% residual on the NOI and 50% upside on sale. Having said that, just about anything is allowed if agreed to and papered correctly.It is also important to keep in mind that any entity (e.g. LLC, C-Corp, S-Corp) set up is not the same thing as YOU. The entity you establish (i.e. LLC) purchases the property from the LLC you already have.Good luck,Oren

Oren K. · Answer

Vid,This is essentially a paper process which you should get a lawyer to help you with. Also, your friend should either get independent legal advice / appraisal or sign that he had an opportunity to do so and waived it. Basically the steps are;- Establish an LLC in which you and your friend are co-owners- Put in place a partnership agreement- You personally then 'sell' the property to the LLC at whatever price you and your friend agree on- You pocket the 1/2 the priceAlso remember to agree on who is paying for the legals / title stuff.Good luck,Oren

Vid Cotarta · Answer

Please let me know what you all think of these numbers and this type of partnership. @Steve Vaughan, Oren K.

Vid Cotarta · Answer

Hello Bill, this property does not have a loan on it. I bought it cash. That is a major advantage to these cheap houses in Ohio. Thank you for the advice @Bill Gulley and everyone else. Time to find a good lawyer in Youngstown Ohio. Anyone have one they trust?

Vid Cotarta · Answer

Hello Brian and Bretney, I just wanted to shed some light on this deal so you understand why it is structured like this. My partner and I are going to buy several homes in the Ohio area. This is just the first.I took this partner strategy from Brandon Turner's format.I live in California and I fly to Ohio find the right properties in the right area that are killer deals and need some TLC. I then over see the entire renovation and get them rent ready. Then I find a great tenant, which is not easy in this area. I then also manage the tenants.Here are the numbers for this particular house.- I am selling the house to my partner for $25,000 (Market value is around $40,000).- It rents for $500.- Tenant pays all utilities.- I have renovated this house for the last 8 years when ever I was in between tenants.I feel if you run these numbers you will see that it is a very good deal for both parties.He wants to be an investor and do no work, and I want to own more doors. Win Win...Please let me know what you think Steve, Oren, Brian and Bretney. Also anyone else that would like to chim in on the conversation.

Bretney Lindley · Answer

if your going to partner 50/50,then sell it to your partner at half the price you paid at current market value,being fair upfront will assure future endevours going forward[win/win]