Seeking advice on buying a property for an unmarried couple

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Seeking advice on buying a property for an unmarried couple

Dennis Cobos
Walnut Creek, CA · Member since 2015 · 33 posts · 15 votes

Hello all!

My girlfriend and I are planning on partnering to buy our first investment property in the Sacramento area in California. We understand the risks that there are in buying a property together since we are not married, and we understand that we need to protect ourselves financially in the eventuality that our relationship ends after we buy the property. We want to get together with a lawyer to create a contract for our partnership, so questions that I have for this are:

  • What type of lawyer should we look for to help us create this contract? Real Estate Lawyer? Family Lawyer? Etc?
  • Does anyone know of a Lawyer that could help guide us in this in the Sacramento area or East Bay of the SF Bay Area?
  • Does it make sense to form an LLC or any other type of entity?
  • Anything else related to partnerships that I should be aware of or need to educate myself in more?

My girlfriend found an article called “Homebuying tips for unmarried couples” that discusses some dos and don’ts about this, and I think it makes some valuable points. But I wanted to get some feedback from people who might have been through this situation or know someone who has.

Here is the article: http://www.bankrate.com/finance/real-estate/homebuying-tips-unmarried-couples.aspx

Thank you for any feedback!

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Naseer Khan
Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
9y

@Dennis Cobos 

The previous poster offered some good advice - you are now entering into a business relationship that will likely last for a long time so make sure this is the person you want to do business with. Nevertheless, investing in real estate can be an exciting undertaking, and I wish you the best of luck. 

Regarding your questions:

1) A real estate lawyer will be best to talk to in this situation since you are dealing with title, property vesting and contracts. 

2) I can offer you some guidance in this area - feel free to reach out 

3) I am fan of having an LLC for real estate investing; however, if you only have one smaller property with a loan on it and you dont have significant personal assets to protect, then it may not be necessary. There are many factors to consider but an LLC does separate your personal assets from your business, creating a layer of protection. If you decide to forego the LLC, you can hold the property as tenants in common, where each of you own an interest in the property based on your contribution - you will need a separate agreement for this.

4) If you form a partnership, it is a very good idea to have a partnership agreement before you buy anything and make sure you keep accurate records of your business activities for your taxes, and your capital accounts. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    My advice? Don't do it at all, unless the reason you are doing it is that your girlfriend is the best equity partner you could find, and being your girlfriend is just a coincidence. Otherwise, you will be back on this site in 3 months asking what the best way to liquidate a joint asset is when one party has defaulted on their payments. 

    If you're hell bent on this, one person could buy and one person could be a financier, getting a fixed return in exchange for their investment and carrying a position on the property. Then you still both have a vested interest in the property, but the responsibilities and consequences are clear-cut. 

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  • Naseer Khan
    Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
    9y

    @Dennis Cobos 

    The previous poster offered some good advice - you are now entering into a business relationship that will likely last for a long time so make sure this is the person you want to do business with. Nevertheless, investing in real estate can be an exciting undertaking, and I wish you the best of luck. 

    Regarding your questions:

    1) A real estate lawyer will be best to talk to in this situation since you are dealing with title, property vesting and contracts. 

    2) I can offer you some guidance in this area - feel free to reach out 

    3) I am fan of having an LLC for real estate investing; however, if you only have one smaller property with a loan on it and you dont have significant personal assets to protect, then it may not be necessary. There are many factors to consider but an LLC does separate your personal assets from your business, creating a layer of protection. If you decide to forego the LLC, you can hold the property as tenants in common, where each of you own an interest in the property based on your contribution - you will need a separate agreement for this.

    4) If you form a partnership, it is a very good idea to have a partnership agreement before you buy anything and make sure you keep accurate records of your business activities for your taxes, and your capital accounts. 

    This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

    1Reply
  • Carrianne Mucho
    Lender · Roseville, CA · Member since 2011 · 205 posts · 86 votes
    9y

    @Dennis Cobos - While I would love to offer advice on your question I admittedly don't have the legal expertise nor a crystal ball to advise how you should proceed with this delicate situation.  I am curious though what area of Sacramento you will be purchasing and what type of property?  Are you relocating to this area? or will this be an investment property?  Happy to help if you have any financing questions.  

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Hi @Dennis Cobos,

    If you want sexy 30 year fixed financing, no LLC.

    But Fannie will lend to a revocable living trust. 

    I'll leave @Naseer Khan to discuss what advantages (if any) a revocable living trust has over TIC.

    The basic rule of thumb is that if you want residential 30 year fixed financing, you need to be people, not a corporation or entity. People get revocable living trusts. People hold title as TIC. By contrast, LLCs are not people, they are corporations.

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  • Account Closed
    Attorney · Sacramento, CA · Member since 2014 · 300 posts · 172 votes
    9y

    As an attorney who owns property who my fiance, I don't think this is situation too complicated. I'm assuming you eventually want to marry this person. If not, then I would not buy property with a girlfriend. Period.

    Assuming you both plan on a future together (i.e. marriage), I would draft a simple partnership agreement and do as the article advises: take title as joint tenants and have both parties on the loan. A real estate attorney could put this thing together for you very easily. And as a previous poster said, I don't see a need to buy as an LLC unless and until you have multiple or very valuable assets to protect. Good luck!

    And of course this is not legal advice.

    1Reply
  • Wes Blackwell
    Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    9y

    Hi @Dennis Cobos! Great question!

    I actually did this exact same thing with my girlfriend less than a month ago. My advice is to treat this investment as exactly as it is... a business venture. You both went into this property together, and one day you may sell it together. Assuming the investment over time remains equal (costs for repairs, mortgage, etc.) then you are equal partners.

    And so, if the relationship ever ends, you can end it as equal partners in this business venture. Depending on how mutual and calm the relationship ends (if ever), you basically have three options:

    1. Sell the property and split the profits 50-50
    2. Keep the property and split rental profits 50-50, or hold to sell later at 50-50.
    3. One partner can buy the other partner out for their share of the investment.

    Now, if one of you is making a really large down-payment with your own funds, you may want to put something in writing about getting that money back if the relationship ends and the property has to be sold. You don't want the other partner thinking they are entitled to half of the equity 6 months from now when they didn't contribute anything towards the purchase of the home.

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  • Dennis Cobos
    OP
    Walnut Creek, CA · Member since 2015 · 33 posts · 15 votes
    9y

    @Naseer Khan

    Thank you for your feedback! Yes, this is the person I want to do business with.

    As for your feedback:

    1 & 2) I will take you up on your offer and contact you for guidance in this. 

    3) After gotten some feedback on LLC's and reading up a little more on them, it seems that at this moment we wouldn't need to do this since we would be buying our first property. After a good number of properties is when this would make sense. Would this depend on how much worth in assets we would have? For example, once we reach $1M in assets is when it would be a good idea to form an LLC?

    4) A partnership agreement would be drafter by a real estate lawyer, correct?

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  • Dennis Cobos
    OP
    Walnut Creek, CA · Member since 2015 · 33 posts · 15 votes
    9y

    @Carrianne Mucho - We are open to most areas in Sacramento, we would prefer the areas of East Sacramento, Arden-Arcade, and Tahoe Park, and we are only interested in multifamily properties from duplexes to quads. We would be relocating to Sacramento from the SF Bay Area, our plan is to 'house hack' by living in one of the units and renting out the rest. I went to Sacramento State so I am very familiar with the area and fell in love with Sacramento while I was there! Would you be able to help us with finding a lender that does FHA loans? or conventional loans that allow less than 20% down? Thank you for replying to my post!

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  • Dennis Cobos
    OP
    Walnut Creek, CA · Member since 2015 · 33 posts · 15 votes
    9y

    @Chris Mason - thank you for that information! After reading yours and Naseer's feedback and doing some more investigation about LLC's, it seems that wouldn't be the best option for us at the moment, since we would just be buying our first property and don't have many assets to need an LLC.

    1Reply
  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 583 votes
    9y

    @Dennis Cobos23 years ago my girlfriend and I purchased a house together and did that with several other homes in the 90's before we got married in 2001. We had many heated discussions about what to do with the rentals when we did not get along. We are now married and things have worked out. If they did not work out we would have just sold the properties and split the proceeds. No need for partnerships, Llc's , attorneys , etc. you can't get conventional financing in the name of a Llc anyway. If you ever have financing questions , send me a email. 

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  • Jake Weir
    Real Estate Agent · Sacramento, CA · Member since 2012 · 111 posts · 26 votes
    9y

    @Dennis Cobos The lending environment is such that, with good income and credit, you should be able to get into a 2-4 unit multi-family with less than 20% down with a FHA financing. A conventional with 3.5%-5% would be doable for a single family; I wouldn't think this would be the case for multi-family. Any lender could check this for you and get you prequalified.

    @Wes Blackwell talked about documenting how to handle certain situations ahead of time with an agreement.  I would also recommend this!  You might be able to get by with a partnership agreement that you and your girlfriend form yourself.  I have something I could send you to get you started.

    Also, you mentioned the areas you are interested in.  These are some of the nicer areas of Sacramento and cash flow can be scarce.  Not trying to dump on your strategy, just want to help set an expectation...  At least your expenses will be lowered with the rents from the other units, you'll gain experience (which can be important to lenders on your 2nd+ deals), and you should be able to save up for your future endeavors.  Send me an e-mail and I can highlight some ideas to consider for your partnership agreement (not legal advice), and a mortgage broker I like to work with.

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  • Naseer Khan
    Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
    9y

    @Dennis Cobos 

    The LLC protects your personal assets (your house, your retirement accounts, bank accounts, stock portfolio, etc) from your business liabilities (i.e. someone gets hurt at your rental property and sues you). So, if someone sues your LLC because they got hurt at your rental, then your personal assets should be safe from that lawsuit, so long as you follow standard LLC guidelines. Accordingly, if you have significant personal assets, then you may want the LLC. If not, then you can hold off until either 1) you acquire more personal assets, or 2) your business assets grow. There really isn't a arbitrary dollar amount where it becomes prudent to get the LLC - it is more of a personal risk assessment.

    A partnership agreement is best drafted by a lawyer who is familiar with contract clauses and real estate related issues. If you forgo the partnership agreement and you get into disagreement, then the Uniform Partnership Act will likely govern your dispute and you will not have any control over that. 

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