Buying Property under LLC or Partnership?

Question

I created an LLC for all my real estate affairs. Lately, I’ve been thinking about purchasing a new investment property with a friend of mine. However, we had no time to properly create a Limited Partnership because we randomly found a potential property and our realtor sent an offer to the seller there’s a chance the seller chooses our offer. Because at first I wanted to purchase the property by myself, my LLC was going to be in the title of the property by using a hard money loan. However, it now seems that I may need more money to and a friend of mine is willing to invest some money. Are we allowed to have my LLC be the “owner” property and then have a written statement stating that we’ll split profit 50/50 and if we were to sell the property, proceeds would be split 50/50 as well.

Doug Smith · Answer

You can, but it might be a good idea to simply start a new one with a solid operating agreement. I find that most customers that comes to us for financing don't have an operating agreement...particularly the ones that are simply a single-owner/married couple LLC. Lenders require it for rental loans (DSCRs, etc), so if you are going to borrow in the name of the LLC, you'll need one anyway. I normally tell people that are single-member LLCs that Law Depot/Legal Zoom is fine, but I've learned in my career that good fences build good neighbors. I would have an attorney draft your operating agreement to make sure all things are addressed and all are protected. Both our real estate and lending arms do joint ventures with investors that inject the capital and/or are looking for experience while we provide the experience, resources, and management of the project/loan all the time. In cases where the investor simply wants a fixed return for a fixed period, we'll usually do a simple debt instrument to us, but when we're both participating in the upside and downside, we always create an LLC. I hope your venture goes well for you.

Jorge Esteban Vargas · Answer

@Tim Delaney Spoke to my lender and he recommended this option! Appreciate everyone's input!

Jeff Nash · Answer

If you create an LLC or partnership I would take all necessary steps to ensure it does what you think it is supposed to do (provide protection).  For example, get an operating or partnership agreement in place that addresses the key issues and allocation percentages. You can do things however you see fit as there is flexibility and you can have special allocations if you want.  Note, I am not an attorney.

Tim Delaney · Answer

@Jorge Esteban Vargas if your offer is accepted your LLC can always assign the contract to the new entity that you and your partner create.

As for setting that up, most of my single member LLCs I have set up on my own and use generic operating agreements. However any LLC I have set up with partners I use an attorney to do the setup and draft the operating agreements.

Ryan Seib · Answer

New LLC for each new partnership with a new partner. Or other entity type. Do not leave them hanging though.

Best wishes with it.

Zach Scherschel · Answer

Aligned with many of the other posts, no matter how good of a friend, new LLC and OA (operating agreement) in place is your and your friend's/partner's best and IMO only option.

I have a property with my best friend of 27 years, we still have an LLC with OAs drafted by a contract attorney for both our and our families protection if something should happen.

Good to have options, and nice work!

Joseph Palmiero · Answer

I would setup a seperate LLC to keep your prior real estate affairs seperate from your deal with a partner.

David M. · Answer

@Jorge Esteban Vargas

That sounds all sort of "confusing..."  Consult a qualified professional...

Anyway, when investing with a non-spousal partner you really should use a legal entity.  Usually, its a LLC.  Partnerships just lack the limited liability protection and if you are doing the GP/LP thing, then its just gets more complicated especially since its just the two of you, and there really isn't much of apoint...

A multi-member LLC is taxed as a partnership if that is where you were going with it...

You could, if you wanted, form a new LLC with your partner and using your existing LLC as the member.  That would just net the LLC's for you...

Your written statement really shouldn't work...  The partner would have to be a member of the LLC which exposes him to any and all of your other deals.

You really should quickly form a LLC with the two of you on it (in whatever fashion), and change the your purchase contract so that this new LLC is the buyer and going on Title.

I'd be happy to chat.  Take care.

Eric Williams · Answer

Yes, that written statement is called an operating agreement and details allocation mechanisms. If not, default state rules apply.

You can usually do 50/50 by stating 50%/50%, or stating each owns units in the LLC that end up being 50/50.

I mean honestly it may be worth an attorney. The governance arrangement is sometimes more important than legal selection. If he dies now cousin Clem is your partner. You may want first right of purchase if he decides to bail for example. Who has decision authority? Etc.

Just a thought.

Ashish Acharya · Answer

You don't need LLC to accomplish what you are trying to do. Document a clear under standing of what is the economics of the deal for now. Implement it.

You can always legalize a partnership with the LLC. The partnership exists with or without LLC.