LLC Partnership - Best Way to Finance Property?

Question

Hey Everyone!

My friend and I located in the Austin, TX area, and have recently formed an LLC in Texas to begin our Real Estate Investing venture together. We both have enough funds and credit score to finance our first investment property, but we were stumped on how to best go forward with financing.

A little background info: I will be planning on living in the house, and we will rent out the other rooms.

For tax purposes, we will run all numbers through the business and split the profits at the end 50/50 (we have already agreed, however, that we will place that money right back into the LLC).

Do we apply for a business loan? Is it possible to buy it using a FHA loan? What are the tax benefits and downsides of each? Or do we just buy one in cash outright? Any help or guidance would be greatly appreciated.

Thanks,

Aaron

David M. · Answer

@Aaron Vu

Usually, its not advisable to hold Title of a property that you are using as your primary residence...

The LLC, which will default to being taxed as a partnership, is a pass-through entity.  You will be taxed on your profits on your individual returns.  So, "...that money right back into the LLC" really has "little" meaning...  Its just what you guys are doing with the funds...

Conforming residential loans like the FHA require owner-occupation and Title be held by a person, not a legal entity.  However, legal entities are not eligible for conforming residential loans so you will have to get a commercial loan if you take Title in the LLC.

You need to consult a professional on how to proceed.  Since you are investing with a non-spousal partner, the legal entity is generally required to be able to handle the apportioning of the profit/losses.  Since you are doing 50/50, I suppose the two of you could take Title as Tenants in Common (TIC) or something similar (depends on what your State allows).  Otherwise, there is no other tax/accounting benefit to investing with a legal entity.  All the deductions you can take are the same.

Here are a bunch of prior threads that may you find useful.  Good luck.

https://www.biggerpockets.com/...

Ronald Rohde · Answer

Hey, congrats! That sounds like a good house hacking plan, but note the difference in interest rates and qualifications. You can get an LLC loan, but you'll have to personally guarantee the note (both of you). Do you already have a primary residence?

Cash is easiest, you can close quickly and be very competitive in a hot market.