Multi Unit - Finance if Partnering and Legal Structure

[Brian Leon]

Hello to all those multi-family pro's. Quick question for all of you and this question will also apply to any SFR's. For those of you who have partnered up with an investor whether it be 50/50 or whatever structure you agreed on BUT the property is still financed and was not an outright cash purchase I have the following questions:

1. How did you structure a deal with a bank for 50/50 loan (e.g., 20% down and each give 10%)? Did the banks give any issues under this structure? 

2. How is the legal structure set up for the property? Is it under both investor names? Reason I ask is typically you can't get LLC treatment if a property is financed. Usually LLC's are if you buy outright or have a well established LLC that has proof of earnings.

I Appreciate the feedback!

[Benjamin Seibert]

Brian,

1) This may differ slightly from the setup your looking for but I currently own a property with a friend of mine (bought coming out of college). We purchased the property as a live-in-flip to own for a couple years and fix it up (while also renting two rooms out to other friends of ours). The loan has both of our names on it and we are responsible for 50% each. The lender can't force you to make it 50-50, but it's just set up so that your both equally liable if it collapses (regardless of how much you put into the deal). Also, with our loan we had to choose one person to take the payments from (being myself). So my friend just pays me back for his portion each month. The bank didn't give us a hard time at all. It was the same process if you just purchased it yourself (other than both people had to provide their own personal information).

2) To put the property under an LLC, you could purchase it with a personal loan and then just switch it to be under an LLC. Technically this violates the due on sale clause (a clause saying that the total loan amount is due once the owner is switched), but I have never heard of a bank actually taking action on this. If you are uneasy about it, I would talk to your lender and have a quick chat with a knowledgeable real estate lawyer. Colleagues of mine have used this approach after financing a property under their name. Their main goal of setting it under the LLC. is to provide legal protection in the case of a lawsuit (at least for their purposes) as well as for tax purposes.

Hope this answered your questions!