How should I structure a partnership?

[Clay Gibson]

Hi, I have 1 buy and hold renovation that I have done at this point and I am looking at the option of partnering with someone who has capital for the next deal. My question is what are some suggestions for best ways to legally structure a buy and hold rental deal? I know that a partnership can be structured any way we both agree to and we could get creative, but I don't want to reinvent the wheel right off. What I really haven't been able to wrap my head around is legally how the property would be owned, would it be owned by an LLC that we form together or would a bank ever loan on that? Obviously I know talk to a lawyer, but I would like to have a good idea what I'm looking for before I start spending a lot of time with a lawyer.

I am looking at single family homes for a BRRR strategy. I would be finding the deal closing it, planning and overseeing the renovation and then managing the property while my partner would be putting up most of the capital. Does anybody have experience structuring a deal like this or suggestions for how I should? Thanks so much!

[Steve Buckman]

Hi Clay, 

As you already realize, there is a number of ways to structure a real estate deal. You are also correct in that you need to retain a local attorney with RE experience.

First, the type of structure may depend somewhat on how well you know the other party. While you will want to "paper up" the arrangements, the level of trust and knowledge about the other person makes a big difference in any deals that I do.

Generally, I like to see an LLC with each person owning some percentage. The LLC then owns the real estate. The LLC acts as a third person to the extent of all the incoming and outgoing monies. The LLC is typically set up as a pass-through entity. The company either makes a profit or a loss with the members (the owners of the LLC) accepting the outcome.

You did not mention contacting a C.P.A. or a tax advisor. While you need the attorney for the LLC or structure, you also should consider the tax implications. In any real estate transaction, you should have both legal and tax advice.

For example, I am an attorney practicing in Tulsa, Oklahoma. However, I always suggest that my clients get separate tax advice. I don't practice tax law and recognize the tax issues can be significant.

Some banks will loan money to an LLC. The bank may require a personal guarantee. If you can't find a bank, there are HMLs who will loan to LLCs.

Please bear firmly in mind, I am not giving you legal advice. Although I am an attorney, I am not licensed in your state. I also cannot form an attorney/client relationship in an online setting. So my comments are from the view of a real estate investor. Go find a local attorney and C.P.A. to help you! Best of luck with your REIs!!!

Steve Buckman
Tulsa, Oklahoma