Basic partnership question

[Richard Ferrero]

For a little background on where I am in my REI career, I'm closing on house #2 in a week and will be turning house #1 into a rental soon thereafter. I plan to repeat that with #2.

As I look forward to building momentum, I am looking at partnerships for rentals. Once you find that partner and agree on a property, (basic question alert!) how do you proceed? Do you put both names on the mortgage? Should an LLC be formed and you work together under it?

[David M.]

@Richard Ferrero

When you are investing with a non-spousal partner, you pretty much need a legal entity of some sort. This is pretty much the only time that an entity has any sort of tax benefits. The deductions you can take are all the same. However, the entity allows the profits/losses to be apportioned to you according to your agreement.

The agreement that establishes your entity will spell out lots of things, including what happens when things go well and when they don’t go well. It’s a business. It’s important that you have these things agreed on ahead of time.

Just remember that legal entities are not eligible for conforming residential loans. You’ll have to get commercial financing. Consult some qualified professionals. Don’t let a residential lender convince you to purchase a property personally just so (s)he can sell you a loan.

Good luck.