Family Loan Vs Family Partnership

[Jameson Collins]

Hello all thanks for reading, 

I am working on BRRRR deal that is going to involve cash from my folks.
Here's the scenario briefly then ill get to my questions, 

Original plan, folks are going to contribute purchase price liquid. I will make purchase/rehab/stabilize rental.  House will be owned free and clear for a few years until folks want money back to purchase new primary residence. I will manage property and receive all monthly income. after a few years I will finance the property with the equity position I am shooting for. 

My questions are about Loan vs partnership. 

If folks made purchase and held title would me receiving all rental income get funky? Need to establish legitimate property management company? Could we just set it up as a partnership where they held equity and I managed property for the income?

Would it be better for them to just loan me the cash for a few years, we hold title and can repay them when we cash out? This seems to be the easiest and most tax eff. but I only say that because I don't know enough about partnerships. 

Let me know if you need numbers or anymore info. hopefully what I'm asking makes sense. 

Thanks again for looking!

[Jameson Collins]

Hi Johnathan, thank you for the thoughtful and thorough response! 

I agree with you completely that taking it seriously is the first step. That's the goal here and that is why I'm trying to get all the details worked out while time is on our side. This agreement is only a consideration because they have some cash they're not planning on using for a couple of years and believe that I can take good care of it in the meantime. For me to be interested, I want everyone to understand everything that is involved and the details of what will happen according to plan.  Managing expectations. The good thing is were a good team everyone understands that this is a complex and significant deal and that there is significant risk involved. Not a casual, hey here's some money, go do good.. Oh wait you did what?!  

 After a bunch of research I am leaning towards a partnership for a few reasons specific to our situation. I've reached out to a highly recommended RE attorney and should get a lot of help in the coming week. Feel free to give feedback in the meantime if you'd like.

Were doing this all remotely so proximity plays into our decision as well. Folks in CA, I'm  in AK and the deal is in OR. Reason for Oregon is adding property to portfolio, team already in place to manage remotely. 

Here is a VERY abbreviated version of my current action plan which is still under construction. any feedback or opinions would be much appreciated. 

1)Work out partnership details, have agreement in place, fill in the blanks at time of closing

2) Parents contribute cash for purchase. I manage transaction and closing with my team. We both hold title. They hold all equity they contributed plus recover any appreciation that may occur in future sales. I contribute capital through my time managing and receive all equity from rents minus expenses (Awesome for me I know)!

3) Assuming favorable market conditions (primary plan, have other options if not a good time to sell), after a few years of collecting rents, I finance the property and cash out parents. They receive their initial investment plus any appreciation and apply those funds toward purchase of new primary residence. 

That's my big blind spot that I'm trying to get figured. If they are cashing out of a partnership it would be ideal if they could apply those funds through a 1031 to a new purchase (assuming 1031 is still a thing). This is where the partnership could be a better option tax wise. If it were a loan situation we would pay them interest (applicable federal rate, basically nothing). They would pay taxes on that interest also basically nothing but how would they recover the appreciation? I suppose when I finance i could cash out that money and gift it back to them over time? sounds like a PITA. I have a lot to learn here and I'm not just trying to eliminate taxes but be efficient and get them the most out of using their cash for a few years. 

Thanks again,

-J