Form an LLC to purchase my girlfriends property?

Question

Hey everyone, my girlfriend and I have made the decision that we want to buy and hold properties, and gain enough cash flow to retire early and enjoy our lives.  Our goal is to continue our W2 jobs for 10 more years (hopefully less) and then retire.

That being said we are at the crucial first investment. Now my girlfriend has owned her condo for about 9 years and owes less than half of the remaining mortgage. Her address is not my primary residence. I would like to form my own LLC, being I am the owner and only employee, and purchase my girlfriends condo for what she owes.

So then my LLC owns her property, and can take out the equity to use as a down payment on another rental. Curious if anyone has had the same thought?

Thanks!

Christopher Brainard · Answer

@Tyler Cox

Hi Tyler and welcome to BP.

As @Daniel Lee mentioned, moving the property to a LLC is going to limit your financing options, especially if you don't have a seasoned company with a track record. Also, your girlfriend selling the property to you at 50% of the value doesn't seem like a very equitable deal for her. I'd make sure that if you decide to do a deal like this, that you structure it so that she isn't losing the equity she has built up or find a way to balance things out.

On another note, investing with someone who you aren't permanently attached to (i.e. Married) can be challenging, if you split up. Make sure that on every property you buy, that you clearly assign duties and ownership interest so things are crystal clear, should the worst happen. In short, pretend you are just business partners :)

-Christopher

Daniel Lee · Answer

Hey Tyler,

It is possible but would limit your lending options. Most of the major banks do not finance to properties owned in an LLC. You can inquire at a small local bank or hard money but most likely would not get as good of a rate / terms.

I would talk to a local loan officers in the area and see what your options are available.

Irina Belkofer · Answer

Is there a reason why she wants to sell it for the price of remaining mortgage?

How much it would sell on free market?

If she wants to invest her share of the condo in your MUTUAL LLC, then it should be written up as such.

Right now, I don't see how it's beneficial for her: she's got a property, market is hot and value is up and she's going to sell/QCD? the condo to you?!? Why?

You have to separate business and relationship, otherwise you might end up in such a mess, no lawyers would help to sort out

Linda Weygant · Answer

If you were my boyfriend, I'd be a little upset that you were effectively stealing my equity.  If you go down this road, I'd write up a contract between the two of you stating that she receives her original equity back out of the LLC in the event your relationship goes south.  With relationships, just as in real estate, always have multiple exit strategies.

I find it weird that she doesn't want to invest but is effectively fine with handing over what may be her largest asset to you to invest with.

Off topic, there are a myriad of complexities in her now living in the house she does not own and how you're going to declare this as a property.  It's not really a rental for you if she's not paying you rent, but now she can no longer deduct interest and property taxes since she doesn't own it, so you'd be caught in this weird limbo state on this particular property.  Additionally, although you said this isn't your primary, if you're living there with her most of the time, it sets up additional weirdness as well.

Tyler Cox · Answer

Awesome feed back it is greatly appreciated. In all honesty, I haven't asked her about this yet, I was curious first if it was legal and second if anyone had done it.

@Daniel Lee @Christopher Brainard - I hadn't considered the lack of financing options with an LLC, and frankly I wasn't aware that would cause an issue.

@Linda Weygant - She probably wouldn't have gone for it, I just wanted to do a little research before I approached her. I just listened to your episode for the second time today, honored to have your opinion, thank you.

@Irina Belkofer - Honestly, if i brought this to her right now, she'd ask me everyone of those same questions.

James Wise · Answer

You'll need to buy it in your personal name to be able to obtain a residential loan on it.

Jingru Sui · Answer

Never thought about it like that. interested knowing what other people thinks!

Form an LLC to purchase my girlfriends property?

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