How to structure STR Partnerships with family?

Question

Pursuing a second home loan/ STR with family. My dad is retired and is willing to be a co-borrower on our loan in order to have enough purchasing power to qualify for the deal. That will likely be his only contribution. He is doing this to help us, but also to make a few bucks aside from his retirement. I have yet to figure out what his contribution is worth, considering I wouldn't be able to do it without him.

Looking for suggestions from experienced investors on how to structure this deal with the lowest tax burden and liability. JV, Partnership, LLC, or none? How would you split this deal?

And yes, I will consult my CPA and an attorney as well. I haven't found an attorney who I am comfortable with. Most I've spoken to are condescending and treat my questions as stupid. On that note, any attorney recommendations around Knoxville TN?

Luke Carl · Answer

If it were my family it would look like this.... I buy house, don't tell any family members, if they find out I tell them "sorry no friends and family" and that's the end of it forever.

For your family it may look like this.

-He gets the loan in his name. 15% down investment conventional instead of second home conventional because this smells like an investment to me and for 5% it's not worth breaking the rules in 2022.

-You have a "partnership agreement" with your dad that says something like

-Dad and Son both own the home 50/50

-Son partner owes dad partner half of the down payment and will repay it over the course of 30 year mini-mortgage using OPM (other peoples money. Aka rental income).

-Dad and Son are on the hook for 50% of the loan EACH per month.

-Son is in charge of all management

-Dad can use the property X days per year (I would limit this to 10 in case dad takes a liking to the property and wants to say screw you and your cash flow)

Note: The loan has nothing to do with the partnership in this scenario.

Note: You should be able to both yours and your dads name on title at closing if you do investment. Although I don't think I'd worry too much or care about this if the partnership agreement says you own half of the equity anyway.

Note: As far as taxes I think you'll find the benefits are similar regardless of how it's structured.

Note: You could take title in the name of an LLC if you want. This would require a loan from a local bank (commercial 20%) or a DSCR loan at 20%

Note: LLCs and Partnership agreements are not one or the other. You can use one or both. Although if the LLC is structured with the partnership in mind then you likely wouldn't need an additional partnership agreement.

Note: I am not a lawyer I don't even have a bachelors degree. But I do personally own 100% of 14 million in real estate. I also like when people hit the Vote button :)

John Underwood · Answer

Definitely have everything in writing down to allowable personal use days. What @Luke Carl has listed above is a very good start to what should be in you operating agreement.

Think what could be an issue or disagreement in the future and address it in writing now.

Also what happens to the share of the person that dies first? All things to address now.

Luke Carl · Answer

That’s a very simple question to ask your loan officer.

Collin Hays · Answer

I recommend attorney Jeff Greene in Newport TN.  He is very familiar with STRs - he owned a couple - and he is also very familiar with business and estate law.  Tell him I sent you!

Grigory Pekarsky · Answer

To enter into a residential short term rental partnership, you must be aware of your state's law. Each state has different laws regarding what type of entity you need to form (some states only allow LLCs and others don't even recognize that form of business). What assets can partners contribute? How are profits or losses split? What are the consequences if someone doesn't pay their share? All these questions need to be addressed in the legal document called an operating agreement. Although this default rule seems simple enough, it can get complicated very quickly. That is why I recommend finding a qualified attorney who specializes in real estate investing to help you through the process.

Luke Carl · Answer

Not that I’m aware of but I would not be surprised if I’m and when it goes away. That’s a topic for a different thread.

Todd Mason · Answer

@Luke Carl are they cracking down on the rules for the 10% down loan for next year? I have heard they want you to use it X amount of days even now but obviously not really happening. Are they going to be requiring proof of stay or something?

Mason Jeffries · Answer

@Collin H.  I will do that. Thank you!

Mason Jeffries · Answer

@John Underwood  Agreed. I hope an attorney will be able to ask us all those "what if" questions that we may not think of in order to draft a good agreement. Thank you sir!

Mason Jeffries · Answer

@Luke Carl  Awesome advice Luke. Much Appreciated. Neither my dad nor my wife and I can afford to buy the home independently, otherwise I would.As far as the second home loan goes, I am very transparent with the lender. My wife and I live in Nashville and Dad lives just a few miles away. The rest of my family visits from California a few times per year. So do we intend on occupying the property for family gatherings and such? Absolutely. Do I intend to rent it out make make money? Absolutely. As far as I can tell I wont be breaking any rules, nor do I intend to. The bump in interest and down payment for the investment loan makes this less attractive.

I like all the partnership ideas you mentioned and will consider using them. I guess the bottom line is, can we just do the second home loan(as family  members), have a simple but detailed partnership agreement, and the taxes are passed through to us individually without the need for a LLC. Have good homeowners and liability insurance. The ultimate goal is a family vacation home that puts money in our pocket in the simplest way possible. Thank you for the advice!

How to structure STR Partnerships with family?

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