All Forum Posts by: Account Closed

I think what you are trying to do is have your friends/family become investors in your deals. You should set up an LLC Agreement, with you as the main manager, and have limited partners/members as 'owners' of your company. If you rehab the property, it goes up in value, and you re-finance (and by implication, get cash out b/c property value has gone up), then you could re-pay the initial equity to your partners through that process. However, you should be clear that the investors only are getting their equity back + some return, otherwise they'll get the full appreciated value of the property.

Alternatively, you could make them junior lenders, although banks probably won't like that.

If you are doing many flips, I think an LLC for each individual flip will be costly and very cumbersome. Your time and money will be spent in paperwork as opposed to rehabilitating the property. I do think a "parent" LLC may be a good idea for the company in general, especially when you do the sale with respect to the construction liability and warranties. But, as many have said, just forming an LLC without following the formalities does not protect you. In order to get the entity protections, you have to follow the corporate formalities, like separate bank accounts, not mingling funds, etc. And, in addition to all of that, a robust insurance policy is a must. Good luck.

On the LLC, I agree there's not a huge need to hire an attorney if you have a very simple business plan and just 1 or 2 investors. As it starts getting more complicated, you definitely should hire someone you trust to help you out, but for the simple LLCs, it's not that hard and you can definitely figure it out. Good luck.

Many banks will loan to the LLC, i.e.: the legal entity and borrower under the loan documents will be the LLC, however, if an LLC has no assets or business history, the individual or "sponsor" of the deal will be a full recourse guarantor under those loan documents.

Thanks everyone, great thoughts.  It's definitely a balance between an accounting nightmare vs. building a relationship for future investments. 

I'm looking to invest in a MF property in Richmond, VA and have 2 other JV investors I'm working with. For simplicity, we have $30,000 down and will buy a $100,000 property. Property is a Class B property and the goal is to do minor rehab work. I have a few friends that also may be interested in the deal, but only want to put in $1000 or $5000 (the "Extra Cash").

Question: Should I take the Extra Cash?   

Pros: - I use the Extra Cash to reduce my downpayment or use it for rehab work.  I get more investors and knowledge in the deal. 

Con: - I have less leverage now, and have less of a return.   

- The return for the larger investors goes down because their piece of the pie is smaller

- It creates more paperwork, more accounting, and too many cooks in the kitchen.  To be fair, the smaller investors will have no management power other than voting on "Major Decisions" like selling the property or approving a budget, but that could be hassle. 

Thank you!

I think @Brian Burke said it best. You could set up these multiple LLCs, but you should analyze the cost and administrative burden. Large institutional investors will always set-up separate single member LLCs for numerous reasons - asset and bankruptcy protection, different equity partners are involved, and because their lenders will require that each entity be a single purpose entity. However, depending upon the size of the deal, it may not always make sense. Take a look at how much it costs to create the LLC, maintain it every year, pay to have an agent (it might be $500/yr per entity) and then decide if it's worth it. On the liability side, I agree that insurance can probably be your best friend.

You probably will be able to have title in an LLC even the first time around, but the bank is not underwriting the LLC, it's underwriting you. The title of the property may be in the LLC, but you will be a full-recourse guarantor. Even if you have an LLC, you need to maintain the formalities of the LLC in order to use it as effective asset protection.

Regarding your second question about transferring title later, you will need Lender consent to do it, which they may or may not give, and you will incur various recording and transfer taxes, if applicable in your state. 

I would take a look at the management agreement to see what they are authorized to undertake. Note that many property managers are given some discretion or emergency authority to undertake certain repairs. It doesn't sound like this was an emergency situation situation. Good luck. 

You will likely need to have the LLC in place before closing. You could sign the PSA individually and then assign it to your LLC to save a few bucks, but if you're closing within 30-60 days, I would just form it and then move to close. You will want to have an LLC in place before closing to avoid transfer taxes, and your Lender (or any smart lender) won't allow you to transfer title from you (individually) to an LLC without their consent. You can probably get their consent, but you might as well do it before closing. Also, depending on the state, you will pay recording and transfer taxes, so it's better just to form the LLC prior to closing.

Good luck!