How should I structure a partnership?

Question

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 · Answer

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 BuckmanTulsa, Oklahoma

James Lemon · Answer

@Clay GibsonI have been approached by someone to do the same thing. I don't need the capital and I have experience, the upside for me is we can scale and I can continue to do my own BRRRs and Flips. Here is my suggestion that I sent him that we will hammer out.Investment Partnerships 1. Name of LLC * Structure, Board, Disbursement, Exit strategy.2. Bank: I suggest Progressive as it has 15% downpayment for deals.3. Rentals: BRRR cash out to by more property.4. Flips: Acquisition and Rehab cost.5. Taxes: Speaking to CPA about structure for taxes.6. Contractors, Inspection, etc 10997. Partnership: If 50/50 work and capital must me 50/50.8. Monthly meeting for planning.9. Leverage: I want to grow the business, but I will also be growing my separate entity. We need to set aside what goes directly back into business and what we keep separately along the way.10. Property Management: I am busy enough with my properties. I suggest when we get to an established number we hire someone. 11. Goals: At least 5 rentals this year and 1 flip. This can be adjusted.12. Long Range Goals: TBD

Andy Mirza · Answer

@Clay Gibson Yes, the LLC seems to be the most common choice for rental properties. We have one for our rental properties.The Deed would be to your LLC's name. I would form the LLC in the state that the rental is in, otherwise you'll have to register it as a foreign LLC and pay the additional fees anyway. Structure it 50/50 with your partner or 40/60 if that makes him or her feel better.The cheap way to form the LLC would be to use LegalZoom or some other online, cookie cutter service. However, if you need more detail (I recommend this), you can spend the $2k or so to have an attorney draft one specifically for you and your partner.

Calvin Ozanick · Answer

If you trust this person, do a 50-50 split. This allows you to do the work, while they put up the funds. They get a passive investment, while you get a free investment. Otherwise, structure it based on how you value the work you are putting in. If you feel that your role deserves more or less approach them about it. Trusting one another and laying a good plan is the biggest hurdle when starting something like this.

Clay Gibson · Answer

Thanks Andy, I really appreciate the input. Did you have any issues with financing with a deed owned by an LLC?

Clay Gibson · Answer

Thanks Steve! I definitely will work on finding a good CPA my last attempt was a bust. Glad to understand better that I could get a real estate loan to an LLC with the proper guarantees.