Ownership Structure - Multiple Investors Pooling Funds

[Michael Allen]

Four individuals and I are considering pooling our funds to acquire a multi-unit property.  I'm trying to determine how to structure the deal to protect each individual owner's interests, minimize liability exposure, and determine what the most logical way to structure the deal would be for tax purposes for each individual investor. 

Our long term goal would be to acquire additional multi-unit properties together as our resources grow.  We would like to initially purchase a four-plex as our first investment property.  We would also like to consider adding individual investors to our pool if the opportunity arises to maximize our leverage.  I suppose we're trying to create a "poor man's" real estate syndicate as we each have $25-50k to invest.

One individual in our group is currently approved for a $300,000 loan as a first time home buyer. We are considering using an FHA loan under his name to finance the bulk of the cost and then pay cash for the difference between the sales price and the amount he is approved to finance. He would live in one of the units and we would rent out the other three units. This is just one option we have considered. I am open to other suggestions that would make more sense or perhaps minimize issues moving forward.

I've read about Tenant-In-Common entities and also read comments on BP about setting up a separate LLC naming each investor as a partner and having an operating agreement outline rights, responsibilities, obligations, etc. From what I've read, the property itself can't be owned or placed in an LLC as it would be a residential property with a loan, so establishing an LLC would be to protect and outline the interests of each investor regarding the ownership of the property?

Although I've purchased several investment properties before on my own, I'm a little lost on how to approach this so any and all advice or comments would be greatly appreciated!

Cheers,

Michael

[Mathew Wray]

Hi Michael,

It sounds like you’re really close to that tipping point where you move from research to action...exciting!

I think Basit is right, you need to talk to an attorney about the various implications of different structures. Ideally, you’ll want to talk with one who knows tax law as well, so you can get advice on both sides of the coin (structure and taxation). Let me know if you want that intro. 

But, before I talk to a lawyer, I'd talk to a few lenders-residential and commercial. Unlike an attorney, a lender's time will be free. Talking to a good, experienced lender will help you frame what's possible given your outline above. There's a lot of info buried in there-high DTI's, liquid funds from multiple people, no wages from you, owner-occupied, etc.

In my eyes, it doesn’t matter how the attorney tells you to structure it if that structure can’t qualify for a loan. Better to go figure out the top two or three lending approaches and then go to an attorney to find the best structure for those approaches. 

That’s my .02! Good luck,

Mathew