Partnering with another investor

[Michael Kammer]

So I am partnering with another investor on a property and was wondering what are some opinions from others out there on it? Full disclosure we have already gotten a place and get the keys next month. I guess what I am wondering is has anyone else partnered with someone on a place and did you guys have a legal document binding each other (i.e. rental income, profit from flipping, etc.) or did you just shake hands on it knowing each other are good to their word? We each want to start up own or separate LLC's in the future. This deal would be to help jump start us both in those ventures.

We are planning on flipping this place together and from their using the potential gains to help fund our other real estate investing goals. We do work with each other as well at the same day time job so there is that as well. 

Any advice on partnerships would be great!

Mike

[Jon C.]

@Michael Kammer you should ALWAYS have the material terms of any joint venture partnership in writing. To not do so is inviting litigation. When money is involved there is always room for misinterpretation between partners. I have invested with friends and we make it clear upfront that this is a business venture and not a friendship outing. 

How do you currently own title to this property? If it's in your own individual names then you need to enter into a Tenancy-In-Common Agreement (assuming you hold title as "Tenants-In-Common"). If you purchased under an LLC then you need an Operating Agreement. Regardless of what many on the BP forums will tell you, you cannot transfer the property from your own names into an LLC if you have mortgage financing.That is called a fraudulent conveyance under the terms of your mortgage loan, and if you ever get taken to court by your lender you can be charged with attempted mortgage fraud. So just don't do it!

In the future (if buying commercial properties) you should setup a new LLC as the owner of each property, and the member of each LLC can be a parent LLC that the cashflow flows up to, thereby making each new property's legal owner LLC a disregarded entity for tax purposes, while providing you liability protection for each asset in your portfolio and the bankruptcy remoteness that Lenders will require.

Seek advice of your local counsel and CPA.