Partnering up with a friend

[Kevin Means]

A friend of mine and I have recently discovered that we both are interested in rental properties and we both think it would be a good idea to partner our resources together in order to get things going for both of us. We are looking at multi family properties in Philadelphia but I’m no sure what hoops, if any, that we have to jump through in order to legally start our partnership. We plan on growing the business as well and buying many properties in the long run. Do we have to apply for the mortgage together? I’d rather just keep one persons name on the mortgage so that we don’t run into the issue of having 4+ properties in our names to early and can maximize how many conventional mortgages we can obtain. Is there a way that we can have a legal partnership with just one of us on the mortgage? Also do we have to file to become an Llc? If you need any other information feel free to ask! Ive done extensive research on the real estate side of all of this but not the legal side with partnerships and I’m not even sure where to start Thanks in advance for any help!

[Steve Babiak]

Re "apply for the mortgage together": as a beginner, you are confusing terminology a bit here, so let's break it down into the various parts.

People apply for a "loan secured by real estate", and refer to that as "applying for a mortgage", but that is not following the strictest definitions of the terms.

A "loan secured by real estate" consists of two components: a promissory note, and a security instrument that pledges the real estate as collateral to secure the loan. A mortgage in the strictest sense of that word is just the latter of these - a security instrument that pledges the real estate as collateral for the loan. And another misconception - people commonly think that lenders give mortgages, when in reality lenders give the loan to the borrower and the borrowers (actually owners of the real estate) give the mortgage to the lender; yes, that is how the terms are really defined.

So let's consider a pertinent example. A couple of years ago I sold a house to a married couple, but their intent was for only the man to be named on the loan. So their agent wrote up an addendum to the basic agreement stating that only the man will be signing the mortgage; I refused to sign that! Agent asked why, I said all owners have to sign the mortgage, the lender won't give a loan if only one of the co-owners signs the mortgage. So agent calls lender, and of course I am right (no surprise to me), and then they do an addendum where only the man signs the loan application, but both of the couple sign the mortgage. The lender had no problem with this, and I did agree to sign an addendum worded more like that.

This example is similar to what @Kevin Means seems to be seeking; only one of the co-owners will sign the loan application, but both will have to sign the mortgage, to give the lender a proper mortgage.

As @Chris K. was alluding to, there are different kinds of arrangements to "partner". They can be a joint venture, there can be a general partnership, there can be a limited partnership, there can be an LLC, and some others. This is the sort of thing where both partners should sit down together with an attorney and CPA together, spelling out what they wish to accomplish, and let the pros give pluses and minuses to each possible approach so the partners can make an informed decision. The plan to borrow is something to also include in the discussions.