How do four people buy a residential multifamily?

Question

Hi everybody,

I'm mulling a scenario, and I'd love anybody's input.

Three friends and I want to pool our capital and BRRRR a residential multifamily. The part we can't figure out is the refinancing. I think we'd have to do one of the following:

1. Buy the property in cash and put all four names on the deed. When we refinance, all four of us would be on the loan. This would allow for a low-rate, 30-year residential loan, but the loan balance would be on everybody's balance sheet in the full amount. (Not to mention that underwriting four people for the mortgage would be a real hassle.)

2. Establish an LLC, fund the LLC, then purchase the property through the LLC. When we refinance, get a commercial loan to the LLC (as though the property were a commercial property). This seems simpler, and potentially saves our personal balance sheets, but we won't get as good a rate and we won't get a 30-year term.

So, to anybody who's purchased or BRRRR'd residential property with partners, how did you do it?

Looking forward to feedback! Thanks so much!

Chris Mason · Answer

Option 1: Everyone's DTI is trashed the next time any of you apply for a mortgage.

Option 2: Looks like you summarized the pros/cons accurately.

Option 3: With all 4 of you on title, you get the mortgage in the name(s) of the fewest possible people, ideally one (but everyone is still on title, everyone owns the property). When it comes time to do taxes, that one person reports, and pays taxes on, all rental income. From there you true up between you. Because you did it this way, no one's DTI is trashed the next time one of you wants to apply for a mortgage.

Option 4: One person buys the property and does everything, it's their property. The other folks are the private hard money lenders of that one person. You round robin it. If Person A does great and is flush with cash from how great this was, then it's Person B's turn to buy a home, and Person A has the capital to be the private hard money lender. A has also paid back C and D, so they also have the capital to help B. And so on, C is next, then D. Draw straws to determine the order, or pick the order by who can best absorb the costs of a "learning experience" being first in line.

Option 4 is the cleanest and best option in my opinion. Keeps roles and responsibilities crystal clear. The odds of 4 people being able to agree on everything, on an undertaking this large, are basically 0%. Frequently spouses can't even agree on stuff when it comes to real estate (hint: wife usually wins), and they're in love with each other! Because of that love factor, the spouse that doesn't get what they want doesn't hold a grudge or anything. When it's friends, there will 100% be disagreement, hard feelings, etc.

Dan Gamache · Answer

Option 2 you can get 30 year fixed with private/commercial lender. You are correct that rates will be higher than conventional financing. These loans do not appear on your personal credit.

Carl S. · Answer

@Jonathan Schwartz bare in mind that as soon as you have 5+ units it will be treated as commercial. I’m not an attorney but my thoughts would be to go with the LLC, it would possibly be “cleaner” especially if you get your Operating Agreement correctly setup. It would also allow you to potentially buyout other partners (you never know what life events may occur) with potentially not disturbing the debt, this could be more tricky if you’re all holding title individually. An LLC could also potentially help with asset protection.