Refinancing a Rehab into a long term loan for one of the partners

[Ward Dey]

Two partners and I paid cash for a property and for the entire rehab. It is now nearing completion.

One partner would like to add the property to his portfolio (his first rental property). We want to refinance it into a long term loan in his name and cash out the partnership for this deal. 

The After Repair Value is around $100,000.  We are into the property $65,000.

There are a couple of ways I've thought about doing this:

1. Sell it to the partner for $80,000 so the partnership makes a return. Find a lender that will accept the amount of equity in the property (20% in this example) and the partner has little or no out of pocket expense.

2. Sell it to the partner for market value ($100,000) then cash out the partnership. We want to give the buying partner a larger share so he essentially has no out of pocket expense.

We want to ensure that we do everything above the board. Would love to get some schooling from you more experienced Pro's out there on the best completely legal and ethical way to structure this.