How to structure a BRRRR STR with a partner (especially the refi)

[Jonathan Godsey]

Hello,

My wife and I own and manage three high cash-flowing STR's BRRRRs in Colorado. She does the design, I do the construction. Now that I have invested all of my money, I am doing a partnership with my dad. We are closing this week on a duplex which we plan to fully gut, make super nice, then turn into two STR's. I'm running into lots of confusing things. I thought partnerships were simple! Here's a few questions:

1) Since he will be able to stay there when he comes and won't be putting a tenant in, we have set up a vacation home loan, 10% down, with both title and loan in his name. We also want to get a construction loan, then refi either everything or just the construction portion as a second position. 

2) Since we're doing the financing through him personally, we were thinking of doing a quit claim deed to a 2-member LLC, which we are in the process of setting up, from him to the LLC after all the financing is done. Is this the best way to structure this? Our main goal is to use conventional financing using his DTI and credit to qualify, thus avoiding more expensive loan products, without breaking the chain of title. Any recommendations?

3) Is there a partnership agreement template that you would recommend? We do intend to hire an attorney, so perhaps that my answer. I guess I'd love a few templates to work through with my dad before meeting with an attorney to think through all the details, without an attorney on the clock. 

4) My CPA is saying that I will be liable to pay taxes on any equity I gain in the LLC this year. Specifically, Dad's input will be roughly $120k, so I'll be liable for $60k of taxes because I'll be gaining equity through services. Is this true? The whole point of doing a partnership is to do everything except pay cash. This probably will be taxed at 22% for me, or just over $13k. Any tax tips on structuring this to avoid this cost?

It seems like all the podcasts and gurus are Super Basic by just saying things like "Partnerships are great. One person bring hustle and the other money." But it seems very complicated. Am I missing something?

Thanks in advance!
 

Jonathan

[Stephanie P.]

Quote from @Jonathan Godsey:

Stephanie, 

Thanks so much for this response. I think you're totally right. So if we don't need an LLC, here's a couple follow up questions.

1) We plan to pair 10% to the construction loan as it comes so we're able to end with 10% equity on the ARV. But since we locked our original loan at 6.625%, rates have risen significantly. What type of long term, fixed loan would you recommend to refi out of the construction loan, without refinancing the 1st position with the good rate?

2) How, exactly, do we add me to title? Quit claim deed at the county clerk and recorder?

3) Since our assets are no longer protected by an LLC, what real risks are we exposing ourself to? I can only think of personal injury, which can be solved through insurance.

Thanks again, this is fun to learn!

Jonathan

I don't know of anyone that will go into the second position for a long term fixed loan, especially at that ltv and with STR's. Get a hard money loan for the acquisition and the rehab and then refinance it into a long term conventional loan in 6 months. Don't worry about losing out on the 6.625%. Use someone else's money for the rehab.

Get the closing attorney to draw up a quit claim deed adding you to title and let them file it with the clerk's office.

You've got it. The only real risk is personal injury and an umbrella liability insurance policy will cover that.