Partnership Financing

[Andrew Jervis]

Hello All,

I have recently teamed up with two other people to form a partnership pursuing MFH in the Philadelphia area. Originally, we thought it would be best to form an LLC, but after consulting with a few local investors, it was suggested that at our level an LLC (mostly due to tax reasons) may not be the best option. Assuming we will not be operating under an LLC at first, what type of financing options to do we have?

One option would be to take the mortgage under one of our names, while the deed would be under all 3, but that has obvious complications. For one, if we were to pool our money into one person's account wouldn't we be subject to a gift tax? And while we all trust each other, I'm not sure all of us would be completely comfortable giving away our life savings into another's account. Plus with only one of us on the mortgage, only that person has liability towards the mortgage, while on the flip side, only that person can take the deductions on their taxes.

Another option, I believe, would be to have all three of us on the mortgage, but I am not entirely sure what that effect that would have on rate, down payment requirement, and how complicated that would get with actually obtaining a loan. 

What does the BP community suggest is the best route to obtain financing for a three person partnership that does not choose to form an LLC?

[John Matthews]

@Andrew Jervis Yes, you deduct the interest as an expense against your business income, as you would depreciation, maintenance, insurance, property taxes, etc. This then gets put on your personal taxes as either a net loss or gain. I don't know the rules fully, but my understanding is that you can deduct up to $25k against your earned income, anything after that you need to be a real estate professional.

As for the loan difficulty, I'd get in touch with a lender or two first. In my experience, just getting started last year, they're most concerned about the property's ability to service the loan. After that, they do want to make sure that you'll pay yourself. I haven't found that many issues with being inexperienced, as long as you don't move too quickly. I have run into issues growing too fast, and having lenders be worried about that, even if the numbers are good. Note you'll almost certainly still have to be guarantors on the loan in this scenario.

I don't have any experience on partnering in another type of structure though, maybe someone else with that experience can chime in? (And perhaps with more than "just do an LLC, it's better" - we like the "why" part here on BP!)