LLC vs. Partnerships Perspective

[Ralph Patel]

We are a group of three friends trying to invest in a property together in the Sacramento / San Joaquin area. This would be my first deal as a real estate investor and as we purchase our first property, we are contemplating about the structure to put in place. From my understanding, a CA LLC can be an expensive structure to hold one property, considering (a) set up cost (which I understand is a one time cost), (b) annual CA franchise tax fee, and (c) higher cost of financing. When analyzing the returns, we notice that the cost of the LLC ate up into the properties returns.

As an alternative to an LLC, we are contemplating on creating a partnership between the three of us and having the three of us have equal ownership of the property. Since there is a limit on the number of investment properties each person can get financed, I'm planning to get the mortgage and title on my name. If all goes well, the group would invest in future properties together and others would finance future properties. To secure ourselves from the risk, we would ensure a detailed operating agreement is in place along with a personal guarantee from all of us, to ensure no one person gets left holding the bag if all hell breaks loose.

Wanted to get a perspective from people who have done this before and things to keep in mind. Any help / advice / perspectives would be appreciated.