Partnership with brother-in-law? How to do it?

Question

Hi! So, my husband and I are self-employed and bought a home to live in in September 2014 at almost the max we were allowed to purchase, according to what our tax returns say. We make more than what it says on paper and our 2015 tax return should be better, but I'm not sure if we'll be able to purchase a 2nd property on what the returns say we make each year. We currently have about $25,000 in savings, but that's not really enough for a down payment, especially if repairs are also needed.

My husband's brother, however, makes good money on paper and wouldn't have an issue getting qualified in buying a home (it would actually be his 4th home - he has been buying properties as primary residence and moving every few years, renting out 2 of his 3 properties now). He wants to partner with us - him being the financial partner and us being the managing/landlord partner, owning a rental unit together.

This sounds like a good idea except the worry of the potential for family problems that can happen when money comes in the picture which I would hope wouldn't be an issue. I also don't really know how to structure the agreement so we are both able to have our names on the home besides buying through an LLC which requires cash payment neither party has. If, say, he dies or we get in a bad argument, we want to be able to have some claim on the property. Are our names being on the title enough for something like that? Also, what about protection from being sued if we are not through an LLC?

We also would like to have the property on our record so we could the profit it as income, once we have a tenant there long enough. What is the best way to purchase a property together so we are both owners of the home? Would he be a primary and my husband be a co-signer? Would he be only the primary on the loan and we would have a separate contract on the side stating our ownership in the home? If he died, I don't know if that second scenario would hold up in us being able to legally keep the home.

I hope I am being clear in what I am asking. While we could eventually save up enough in a year or two to buy a home, my brother-in-law would be able to fast track us by being able to be our money now and get an investment property much sooner. Since this would be our 1st income property purchase, I just don't want to do it the wrong way, especially legally, just in case. It would also be nice having someone that is a little more familiar with being a landlord to help us with our 1st prop.

*For a little more backstory, we have 3 little children and don't want to buy homes like my brother-in-law and move every year or so to get the owner occupied loans. Also, our current home wouldn't rent to truly make a net profit on it.

I appreciate your time in reading and answering my questions.

Jonathan Ortiz · Answer

@Stephanie Hardy

Great post Stephanie! I would definitely recommend purchasing any buy and holds under a Domestic LLC (with the LLC being the owner) even if there are multiple parties involved, especially since Nevada laws tend to be "investor friendly"when incorporating LLC's in Nevada. A LLC will act as an additional layer of protection for everyone, and you can still obtain financing with a LLC and you do not necessarily need to have "all cash" to purchase a property under the name of a LLC. By having the property under a personal name(s)..now you do not have Asset Protection, and you are leaving yourself open for anyone to "attempt" to sue you directly rather then first going through the LLC. HINT:  IF someone tries to sue your LLC - "that person" or "entity"can ONLY go after any assets owned by the LLC that is being sued. IF that situation ever came about - Talk to your attorney on next steps AND reach out on the BP forums for advice!! You can have a LLC with you, your husband, and husband's brother all act as "managers" of the LLC, and you can structure your LLC Operating Agreement (which your attorney can help) to outline all of the terms and conditions, and list each individuals "share of ownership" of the LLC. OR, you can purchase the property with 2 LLCs - You and your husband can purchase the property under your own LLC while adding your husband's brother's LLC as an additional buyer to the purchase agreement contract. Then, each of the LLC entities can each share 50% ownership of the property.

In addition, there is one final matter on which I can assist you … it is in the preparation of your “corporate resolution” OR “resolution”….

NOTE: Some investors have a LLC for their buying-selling (“flipping”) entity, others have a “s-corp”.

Please be  aware that you make an “s-corp” an “s-corp” by filing an “s election” for your corporation entity with the IRS.

Also please be aware that you can make an LLC an “s-LLC” by filing an “s election” for your LLC entity with the IRS.

The result is the same whether you start with a corporation or with an LLC.  There can be benefits to either entity.

Also note that whether you have an LLC or a corporation or an "s-elected" LLC or an “s-corporation” … your company can be, in casual conversation, be referred to as a “company” or “corporation”…

So, you may hear someone ask you for a “corporate resolution” in conjunction with your LLC.

Also, a corporation or an LLC can have a “Resolution”, whether it has an "s election" OR NOT!!!!

Your “Corporate Resolution”

From time to time, you may be asked by a bank or Seller or partner to provide them with “a copy of your Operating Agreement” for your company. 99% of the time, you really do not need to provide an actual Operating Agreement. In fact, your Operating Agreement should be confidential; so, it is probably best that no one should see it. Instead of giving out your Operating Agreement, IN THE VAST MAJORITY OF CASES, you can provide them with a “Corporate Resolution” or a “Resolution”. This Resolution will give them all they need.

NOTE: If you are in a situation where someone is demanding your Operating Agreement, please contact your attorney immediately! In such cases you should probably strip your Operating Agreement down to a minimum so you can send it without compromising your desired confidentiality and, then, create addenda and resolutions that are separate from your Operating Agreement, and which you can keep confidential. In this way, you can avoid giving out your confidential paperwork (except maybe by court order in extreme cases).

When you create a statement from your company that authorizes a member or owner or officer or designated other person to perform a duty(ies) or function(s) of your business, this statement usually needs to be signed by someone who is identified in your Articles of Organization (or Certificate of Organization – whatever it is called in the state of origin) as an authorized person. Any such statement can be referred to as a “resolution”.

NOTE that the document can be called a “resolution” or a “corporate resolution” because the word “corporation” or “corporate” is OFTEN used by accountants and attorneys to describe EITHER an actual corporation or an actual LLC. In its generic use, the term “corporation” or “corporate” can be used to describe any “company” or “business entity”.

You may be required to have your resolution document notarized, so it's best to be prepared and get it notarized. Hope this helps! Best of luck to you!!

Ingrid J. · Answer

@Stephanie Hardy Welcome to Biggerpockets.

These are questions which must be answered by a real estate attorney. I would involve all parties in the process of meeting with a lawyer to discuss your options. There are usually ways to circumvent having to incorporate an LLC if your aim is simply to devide the gains and duties among the separate parties through a contract.

Brian Mathews · Answer

My advice is to not do it.   It doesn't matter what a piece of paper says.    Legally you will be in the right, but relationship wise you'll be in the toilet.   Who cares if you're right if your husband loses his brother?  Take your time, cut expenses, save up money and do it yourself.    Thanksgiving dinner will taste much better this way.   The borrower is always slave to the lender.

Cal C. · Answer

Clarity in what each party is expecting is very important.  If one of the partners expects something that one of the other partners doesn't expect then that can make for some pretty bad tasting Thanksgiving dinners.

Using a RE attorney to do this is probably a good idea, but at the very least I'd write down everything everyone is expecting and sign off on it.  I'd also list out what will happen if things don't go as planned, both GOOD and BAD.   For example you buy  a rental and suddenly someone swoops in and offers you a great price for it.  One of you may want to sell but the other may be facing a big unexpected tax hit.

Mike Garrison · Answer

ingrid is 100% correct in saying to use a good real estate attorney, they know the ins and outs of what you are trying to do.

What is the old saying? an ounce of prevention is worth a pound of cure.

Wish you the best

Mike

Stephanie Hardy · Answer

Ingrid J.

Thanks for the advice. I definitely want to make sure we are on the same page in writing! I would hate to ruin the relationship. I guess, too, I just wouldn't know what to pre-address so a RE attorney would be very helpful. Thank you.

Stephanie Hardy · Answer

@Steve Haight

Thanks for the input. I guess I just gotta keep on looking and find that deal!

Steve Haight · Answer

@Stephanie Hardy

@Brandon Hicks has a good point, your knowledge can only take you so far, creative financing, there are so many creative financing strategies. When I bought my first property I had no money just sure determination and found a no money down deal and flipped it for 20k 6 months later, I was hooked. In fact the property was in Sandy Valley Nevada.

Good Luck

Stephanie Hardy · Answer

@Rich Lennon Thanks for the advice. It would be a shame for something like money to ruin a relationship.

Partnership with brother-in-law? How to do it?

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