Asking for a friend - Joint Venture (JV) LLC deal

[Roy Marks]

Hey BP Community,

Another head scratcher for you. This post is actually a description of a situation my friend is in. He asked my input simply because he knows I'm interested in real estate investing. I'm not sure what to advise, so I come to you, honorable folk of the BP message boards!

CONTEXT:

- My friend, B, is a high income doctor in Los Angeles. I have no idea how much money he makes, but let's call it $500k. 35, single, renting, but looking to buy a first home/investment property.

- B's friend, N, is a medium income professional in Los Angeles. I have no idea how much she makes, but let's call it $100k. 35, single mother, renting. Super responsible with money and so forth, but does not quite see a path to home ownership and wealth creation in Los Angeles, given the price of properties here, the high downpayment, etc.

- The Property is an $850k lot with two 2/1 homes on it. The monthly cost is about $4000. Market rental prices: upper home could rent for $2000, and the lower home could rent for $2500. 

SPECIFIC SITUATION:

- B can buy the home as-is, and run it is a rental and/or owner-occupied. B has enough capital for 20% down, closing, and even $50k of rehab. This would not be financially challenging for him.

- At the same time, B is very good friends with N, and they are upfront about their respective financial situations. B offered to N rent one of the units at a slightly sub-market rate, in exchange for playing a "property manager" role.

- B then realized that, rather than having N be a tenant, there may be a way for him to help N earn equity/create wealth. Rather than just renting from B, N could buy into the property with a small downpayment, and through monthly payments over time. Two options could exist for this:

Option 1: B buys the property independently, then explores creating a TIC (Tenants in Common). This would parcel out the two units, and he could sell the second unit to N. Because N may not have capital upfront, B could offer a seller financed deal for the unit. This would keep the units effectively separate, and N would eventually clearly own one of the units, and B would clearly own the other unit.

Option 2: B buys the property, with some downpayment+closing+rehab cost support from N. Suppose the total amount required is $250k. B could put in $225k, and N could put in $25k. The two would then put the property into an LLC, with shareholding split 90% to B and 10% to N. The two would then pay market rents to the LLC, and share in equity upside upon the future sale of the property, or on rental profit upside under future buy-and-hold scenarios. Does the 90/10 split sound fair, or is N's participation closer to 3% (25k/900k)?

What are your thoughts, BP Community, about this situation? How can B provide N a great place to live and offer a path to wealth creation, while also keeping all Terms and Conditions above board? B is a new investor and wants a return, but does not want to be overly extractive towards N (i.e. wants to give N a good deal and a path to ownership). This is B's first deal and he will likely have the ability (due to his income) to do more in the future. His goal is not to financially crush this deal out of the park - particularly with N being a good friend.

Similarly, how does N know she is getting a good deal? What are some of the downside risks for her?

Looking forward to comments - pros and cons - lessons learned - tips from folks that have been in similar situations. Links to other articles, deal precedents, forum posts are always welcome. 

Many thanks!

Roy