Looking for a structure for our cash partner

[Michael Wentzel]

I am looking once again to the collective wisdom of Bigger Pockets.

We started buying run-down properties, fixing them up and then refinancing them to get most of our cash and down payment money back out of them. This leaves us with cash flowing properties and little or no cash left in each deal. I don't think this is a new strategy.

As of today, we have a friend who is willing to be a cash partner with us. Our thought is that we would take cash from him for the purchase and rehab of the property. Then when we refinance (estimated 2 months) we would pay him back with interest.

We are just wondering about structures investors have employed to execute similar strategies. Promissory notes? Partnership? LLC? I really am pretty ignorant in this area. I haven't even setup an LLC yet to hold these properties. I also want to create a system that is legal, protects both of us and is easy enough to replicate two or three times a month if we scale up the acquisition of properties.

I know there are probably threads out there that address similar topics. But I wasn't even sure what to search to find relevant information.

Mike

[Jerry W.]

Hey @Michael Wentzel , I am not as savvy as many of the accountants on here like @Steven Hamilton II . But here are my thoughts.

Your friend does not need an entity to make a loan to you. To protect him, he needs a promissory note and mortgage on the property. If he doesn't have one you could sell it and not pay him, or a creditor of yours could seize it for debts and he would be out of luck as he was not a secured creditor, even though his money bought the property.

If you are doing buy and hold you might form an LLC or a Sub S corp. I think most favor the LLC. Ask a certified accountant. Your friend gets a 1099 that reports as passive income to the IRS.

Most lenders will not allow an LLC to be the only responsible person to sign the Note and mortgage, they require a personal guarantee. If your friend is smart he will get that even if you form a company to do this.

My rentals are owned by a Sub S corp, but it has been in existence for 30 years or more. I was not as sophisticated back then in the law.