Logistics of a 50/50 Partnership Deal

[Zane Lyons]

Hi folks,

This is probably a simple question, but I'm having a bit of trouble finding the exact layout of a 50/50 partnership logistically, e.g., title, loan, funding etc.

I am looking for my second value-add deal and found a partner who is willing to invest purely financially and split 50/50 if I find the deal and do the work to rehab and find tenants (or flip).

We have discussed some ballpark numbers, but I'm fairly certain he is willing and able to stretch it if the right deal comes along. He has a decent amount of liquid cash and mentioned he could pull out an equity loan if we really needed to buy something cash, but he will likely be getting a mortgage in his name.

My questions are mostly based around the logistics:

1. Do I need him to get pre-qualified for a second mortgage/vacation home mortgage/anything like this before I find a deal? Again I have ballpark numbers, but don't have a hard line of what he could get a mortgage for and not.

2. Assuming I find a deal and we both agree to it, do we then form a joint LLC, sign operating agreement, open a bank account etc. that he transfers money into?

3. I assume we put the deed in the LLCs name, but the mortgage would be tied to him directly. We have a good relationship, but he did mention concern about having the mortgage solely in his name while each technically having 50/50 ownership of the property. Hypothetically, were I to run off, I would still own 50% of the property and have no obligation to the mortgage... right? I would like to quell his fears about this.

Any other tips of the more banal side of structuring a deal like this would help me wrap my head around it. 

[Andrew Postell]

@Zane Lyons thanks for posting.  I'll answer these one at a time if you don't mind:

1. Do I need him to get pre-qualified for a second mortgage/vacation home mortgage/anything like this before I find a deal? Again I have ballpark numbers, but don't have a hard line of what he could get a mortgage for and not. - So technically, no, you don't need him to get prequalified.  You would get a loan under your PARTNERSHIP.  That's the right method to use.  Get prequalified by your PARTNERSHIP.  Any commercial or DSCR loan (well, any good one at least) will lend to your partnership.  That's the right structure here.  You do not want a personal mortgage to go into either of your names when you have a partnership structure.  There's lots of reasons for this...get the loan in your partnership's name.  Getting prequalified is free to do and you don't need specific numbers in order to be prequalified.

2. Assuming I find a deal and we both agree to it, do we then form a joint LLC, sign operating agreement, open a bank account etc. that he transfers money into? - You should absolutely do this right now BEFORE you find a property.  What if you find a KILLER deal...but you have to close in 10 days?  That's not enough time for you to create the company and open any bank accounts, and that might be needed for a VARIETY of reasons to buy a property.  Get that partnership formed right away and open those bank accounts.  You don't want to miss out on a great property because you don't have your paperwork completed.

3. I assume we put the deed in the LLCs name, but the mortgage would be tied to him directly. We have a good relationship, but he did mention concern about having the mortgage solely in his name while each technically having 50/50 ownership of the property. Hypothetically, were I to run off, I would still own 50% of the property and have no obligation to the mortgage... right? I would like to quell his fears about this. - This is exactly why I say to get a loan that is NOT in either of your personal names.  Not only does it open you to liability risks...but any personal loan means you are personally liable for that loan payment.  This is part of the "VARIETY" of reasons I mentioned above.  So if you are personally liable for a loan, that means it's on your credit.  It could affect how someone might qualify for OTHER things later.  When you are personally liable for a mortgage (like with a Fannie/Freddie style loan) you are personally liable for 100% of the payment - even if you have a co-signor.  A co-signor just allows someone to qualify for a loan who would otherwise not qualify.  It does not split the obligation 50/50.  With Fannie/Freddie every co-signor is 100% obligate for the ENTIRE payment.  So if you are responsible for 100% of the payment...and you are splitting your profits with your partner...you see where I am going,right?...then you will be showing a loss on the property!  I hope you are getting what I am saying.  Having a personal loan in your name, that should be under a business, could jeopardize you from getting a car loan, a student loan for your child, even another home. This is one of the main reasons why we put the mortgage in our PARTNERSHIP name.  Now there are some ways around what I am saying here after 1 year....but why even risk it? And then there are still a "variety" of other reasons why to not have it in your personal name. Just get the loan under the business name and everything works out. 

*WHEW*  I hope all of that makes sense but feel free to post anything else.  Thanks!