Is this type of partnership legal?

Question

Hi everyone! I am an international investor new to the US market. Every year, I stay in the US on business visa for a couple of months and scout for multifamily properties, mostly in Chicago, NYC and Boston areas. I feel that I am currently in a dilemma: on one hand, it is very difficult for me to find home mortgage loans as an international buyer (I do not have SSN); on the other hand, even if some mortgage companies will provide loan for me, they ask for 50% down for multifamily properties. Without the an adequate leverage of the bank loan, the return on investment in real estate will be too low.

In this context, I am contemplating forming partnership with American citizens with good credit scores so that we can buy multifamily properties together with only 20% down payment. But I am not sure if the following scenario is a legal practice in the US:

This American partner and I form an LLC and make an offer for a $2M multifamily property together. By using his/her excellent credit score and tax records, my partner will be responsible to find a bank that could finance 80% of the purchase (namely $1.6M). We will have a 50-50 split of the share of the LLC and we will pay $400K together as down payment.

However, as a bonus for my partner who used his/her credit for the loan, I will pay 60% of the down payment ($400K x 60% = $240K) but only claim 50% of the shares (equity) of the LLC. On the other hand, my partner will only pay 40% of the down payment, namely $160K, but he is entitled to 50% of the equity.

I am wondering what is the legal implications of this arrangement? Is it legal in the first place? If it is legal, is it risky to do so? What terms and conditions should I add to our contact to protect the interest of both parties?

Thank you for your advice, BP'ers!

Barbara G. · Answer

It sounds fine. If that is what your final agreement is. A partnership can be any arrangement if both people agree. You are offering the Partner 10% more for his credit. He will also be your feet on the ground, or he will be the person closest to the investment and probably will be doing more of the monitoring of the Property and the Property Managment then you will be doing.

Good luck and keep us posted on how and where you find this partner and what kind of property you locate.

Ewan Tong · Answer

Yes, cash flow is my most important consideration, too. I concentrate mostly on major cities because it is easier to get demographic data and rental statistics about these places.

Ewan Tong · Answer

Thank you, Barbara. I am constantly looking for multifamily properties in Boston areas, NYC and Chicago. But prices have gone up so fast especially in Boston and NYC that the cap rate is fairly low to justify the investment. What cap rate do you usually aim for?

Jay Hinrichs · Answer

@Ewan Tong

@brianburke

I would look up Brian Burke on this site... he has a new offering and you would do just as well if not better investing with someone like him .. instead of trying to hunt down a deal he has it all teed up for you and has an impeccable track record of success... That's one way to lay off the capital you have... another would be to start taking a peek at the crowdfunding opps...  REalty Shares and Realty mogul they will have Multi family and commercial deals were you can lay some capital off as well.

You lose direct control in these situations but if you get the right deal , you get your money out and working for you... Many who go on the hunt take forever to find anything or never do and you could be invested today.

At the end of the day your still taking a risk with a credit partner which you may or may not have.. why not do it with established one's that have a vehicle for you to just jump right into.

Just throwing out some options.

Ewan Tong · Answer

Yes, you are right, Jay. It's a dilemma. I am trying to think up more creative solutions.

Ewan Tong · Answer

Thanks, Bill. Yes, I am still seeking other partners on other deals. But good deals are difficult to find these days.

Jay Hinrichs · Answer

@Ewan Tong

on the face this is fine and done every day.. and the LLC allows for uneven distributions.

As Bill states though banks generally will want anyone with more than a 19% interest in the LLC to be on the loan and if a PG is required to PG.

That said if your credit partner is strong enough then it should work fine.

You may have to sweeten the pot a little for your credit and state side partner who I would think is going to run the show.  Other wise with the scenario you outlined if they have the wherewithal to get that kind of loan they probably don't need you or that small amount of equity ... they can probably find it themselves and at better terms... Just my gut thinking on that one.

Bill Gulley · Answer

Nothing wrong with the partnership, however, thinking a bank will just look at one partner and not the other isn't reality. It may go that way if your partner qualifies for the whole thing on their own, reserve assets, tax returns and management.

I suggest too that you speak to an attorney about the right entity, an LLC may not be the best solution. Would you be seeking other partners on other deals?

Don't forget about seller financing, it's more common in multi-family. Good luck :)

Barbara G. · Answer

We do small multi family houses and are no where near the money you are talking about.  We do our own Managing.  We can't afford the city. We concentrate more on cash flow.  We do a lot of work so we are not passive investors.

Ewan Tong · Answer

Thank you, Karen. Yes, I think I am going to speak with a lawyer but at the same time I am wondering if there are some other people in this forum that actually used this kind of strategy for partnership. :)

Is this type of partnership legal?

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