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

[Jaysen Medhurst]

@Michael Allen, I'm not a lawyer, but sounds like you're walking some real fine lines, if not outright planning to cross them. If your friend purchases a property using and FHA loan, then it's his property. A partnership is off the table at the outset.

One strategy could be for your friend to buy the property using the FHA, then after a year he sells it to the LLC formed by you and your partners.

To be clear, there is no such thing as a "poor man's RE syndicate." Investors in a syndication deal must be "qualified investors" according to guidelines set up by the Federal government ($200k+/year income and net worth of $1MM+, excluding personal residence, I think). The SEC is all over this kind of thing and you will be in a world of hurt if you try to skirt the rules. 

Let's start with a simple question, how much total cash can you and your partners bring to the table? Give us some info and the community can offer up some ideas. Don't get to bogged down in partnership / LLC / Tenant-In-Common just yet.