Dear Recpataxman,
Thank you for such a detailed response, but ... huh?
If I understand your reply correctly, the following:
Assume that Joe is simply looking for a partner with credit. He does all the work (finding properties, due dligence, and management), but can't get a loan. He finds a property for $100,000, with gross rental income $1,000 pm and mortgage and other costs of $800 pm.
The best structure would be:
- Joe and Mike form an LLC.
- The LLC, which has no credit history because it is new, gets a loan based purely on Mike's credit score and history, since Joe's is bad / non-existant.
- The LLC is listed on the title
- The LLC's partnership agreement essentially states that all income and expenses related to the property are Mike's responsibility.
- "Income" includes all gross receipts generated by the property ($1,000 pm)
- "Expenses" could then include mortgage and running costs ($800 pm) in addition to a $200 "management" expense (or similar) to Joe.
- In effect, Mike's net Tax obligation would be zero (until the property was sold), and Joe would get an income of $200 per month. In reality, Joe would be actively managing the property, and Mike would have to do nothing.
- Joe could then re-finance the property under his own steam once he has built up his credit. Or, could the property be quit-claimed into Joe's personal name or another LLC? For that matter, I suppose the loan could be assumed by Joe as well.
I suppose an incentive for Mike would be an equity split on sale (as you suggested), or an up-front cash fee, or a payment to Mike upon re-fi, or something similar.
Does this sound about right?
