Financing a Project Through a LLC

[John Whitridge]

Hi BiggerPockets, I am looking to finance a deal for a single family home through a LLC that I am setting up which seems pretty straightforward. I am using a hard money lender but do not have all the money myself so I am looking to bring on a partner to help finance the deal.

Based on the research I have done so far it seems like the easiest option is to pool our money together under the LLC and have the LLC take the hard money loan. Is there any advice or pitfalls to be weary of when doing something like this? Or is there a better strategy to pooling money together for a loan?

Looking forward to hearing some great advice!

[Everett Fujii]

That is the easiest option, and cheapest.  

Be aware that the investor might have to share in the downside risk.  In my deals the investor is the member and I am the manager.  But my financials are sufficient enough that I sign for the guarantee on my own as I can cover it myself.  If you cannot do that, then the lender might require your partner to sign on and guarantee the loan also.  

Standard pitfalls with LLC's (and partnerships in general) are to make sure you discuss who is responsible for what and what will happen if things go bad. Not discussing what you both will do if things go wrong is not a sign of weakness, it's a sign of understanding and realizing that no matter how good a plan you set the possibility that things might go wrong exists.

Are you doing all the work and your partner is only responsible for money? If the project takes longer and the LLC runs out of money does the investor put in more money at a better return? If the rehab costs more what happens? If you want to sell does the investor have a say? If you want to sell and the investor doesn't, what happens?

It's always best to discuss the bad and what to do when/if it happens than to just hope nothing bad happens.