What happens to mortgage interest deduction in an LLC

[Adrie Moses-bailey]

Hey guys, looking to do my first deal and may need to partner with some friends (4 of us) to do it. I was thinking putting the property in an LLC would be the best bet to protect everyone's assets. One thing puzzles me though, I realize I usually don't consider the mortgage interest deduction and Depreciation expense when evaluating properties but these are huge aids in wealth building. What happens to these when you invest through an LLC.

For context I am looking at a $99K condo right now that would cashflow about $244 after expenses of 275 including HOA fees and mortgage of 401 a month for 30 years after a 20% down payment. I can provide more details if that would help you guys answering my question and feel free to weigh in on whether an LLC is an appropriate structuring for such a small partnership.

Pro forma below, column 2 is 12 month while column 1 is one month. The formula for Mortgage payment just copies last years monthly payment unless I put in a new purchase price (signifying a refinance) at the top of the column so the $401 a month payment in column 2 is accurate.

Purchase	99,000
Downpayment	20%	20%
Finance Amount	$ 79,200	$ -
Downpayment amount	$19,800	$0
interest rate	4.50%	5.75%
Mortgage(years)	30	30
Mortgage Payment	$ 401	$ 401
$ 4,815.54
Vacancy Rate	8%	8%
Time Period	0
Income	Monthly
PGI	$ 1,000	$ 12,000
Vacancy Rate of 0.08	$ 80	$ 960
EGI	$ 920	$ 11,040
Miscellaneous	$ -
Income	$ 920	$ 11,040
$ -
Expenses
Property Taxes	$ 56	$ 671
Water and sewer	$ -	$ -
Property manager	$ -
Maintenance and repairs	$ -
Insurance	$ 20	$ 240
Elevator service contract	$ -
HOA fees	$ 155	$ 1,860
Electrical	$ -
Fuel	$ -	$ -
Capital expenditures	$ 44	$ 528
Total Expenses	$ 275	$ 3,299
NOI	$ 645	$ 7,741
Debt Service	$ 401	$ 4,815.54
Net Income	$ 244	$ 2,925
YOY increase in net income
PV		$ 2,925
Present Value of all CF	$ 81,919
Acquisition Cost	$ 23,760
NPV	$ 58,159
Return
Cap rate	2.96%
Multifamily (5 Units+ Value)		$ 58,509
Cash on cash return		12.31%

[Michael Plaks]

@Adrie Moses-bailey

While @Paul Allen very well explained what would happen when/if you form a 4-way LLC/partnership, I urge you to consider if you can avoid this route altogether.

The best possible structure for a project like yours (for a great many reasons, taxes being just one of them) is to keep it as 100% your deal. Your buddies should be your lenders, as opposed to co-owners. They can be compensated based on any formula you agree on, including some form of profit split. 

You will bear 100% of the risk, but you will have 100% of the decision power - something most new investors mistakenly undervalue.

And you will also eliminate 90% of potential problems down the road.