Was wondering if someone with some experience with this could give me some pro tips. As a general discussion, assume 3 equal partners form an LLC to buy a rental property. What should these investors expect or watch out for? Any good advice would be helpful.

Thanks

The first issue is that you can not get conventional financing in an LLC. That is not to say you cannot get financing, just not a conventional loan. Therefore, the rate/terms will likely not be as good. It makes it harder to get fixed rates, maybe require more down etc.

Also, I think it is prudent to have a clear exit strategy meaning you plan on selling in x amount of years etc so you do not run into the issue with one partner needing to cash out sooner then the others want to etc.

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Get a lawyer to help you draw it up.

Have a well thought-out partnership agreement that defines the buyout process if you get in a fight with your partners.

Make sure it defines what is to be done when more capital is needed because you didnt foresee something.

There are ways to do this and it isn't all that complicated. The key issue is not legal but personal -- can the 3 people work together cooperatively? Usually the answer is no, at least in the long run. But as long as enough pre-planning is done to cover most possible contingencies, you should be OK.

Don't do this without a good corporate attorney, which won't be cheap but will be well worth it. Anyone can form an LLC, but you need proper legal advice on a number of issues. At a minimum:

-- (defacto) partnership advice and agreements
-- proper corporate structure
-- asset protection
-- leases
-- tax advice (CPA)

Bitter Old Man, that is very good advice

91AgLaw, do you think your advice is true for all cases? Even for, say, one piece of residential property at <$500k value?

I've always been of the opinion that if its worth doing, its worth doing right. But don't take my word for it. Look at some real world examples of what might happen:

-- 2 partners get tired of the third for whatever reason and try to squeeze him out;
-- renter does not purchase insurance on their belongings, fire happens, and they sue all three of you personally;
-- 1 partner runs into some severe financial problems, house takes a huge drop in value (see 2008), all three want to sell but can't come up with how to pay for the deficiency and realtor commission;
-- 1 partner gets into tax trouble with the IRS who puts a lien on the house;
-- 1 partner has one or more unpaid judgments and a lien is placed on the property;
-- tenant who is judgment proof or files bankruptcy after trashing the place, causing 50-75K or more in repairs needed before property is inhabitable; partners can not come up with that money;
-- 1 partner gets a divorce; ex-spouse demands half of his or her equity; partners don't have cash;
-- 1 partner dies without a will and life insurance, has adult and minor children and spouse, all of which want his equity from the house, but 2 remaining partners do not have any cash;

I could go on for hours. I don't think any of these scenarios are the least bit far fetched, but if they were, you could easily change the facts a little and come up with huge potential problems. Proceed at your own risk, and remember: though I don't really do it much anymore, about 75% of my historical practice has been cleaning up one mess or another. And its cost my clients 8-20 times more than what it would have cost had they come to me in the first place.

I'm about to buy some rental property with a partner. Do these suggestions above still hold true? It will be just 1 property going in 50-50 on it. Sharing expenses and sharing monthly rent payments. I do have various questions, like at tax time how do I allocate what I have spent and I have been paid? Does there need to be a separate checking account other than personal accounts that the payment will go into? Property will be bought with cash, so which person's name is the actual owner of the property per tax records?

If anyone has a venture out with a partner on rental property, do you mind if I reach out and contact?

Quote:

---

-- 2 partners get tired of the third for whatever reason and try to squeeze him out;
-- renter does not purchase insurance on their belongings, fire happens, and they sue all three of you personally;
-- 1 partner runs into some severe financial problems, house takes a huge drop in value (see 2008), all three want to sell but can't come up with how to pay for the deficiency and realtor commission;
-- 1 partner gets into tax trouble with the IRS who puts a lien on the house;
-- 1 partner has one or more unpaid judgments and a lien is placed on the property;
-- tenant who is judgment proof or files bankruptcy after trashing the place, causing 50-75K or more in repairs needed before property is inhabitable; partners can not come up with that money;
-- 1 partner gets a divorce; ex-spouse demands half of his or her equity; partners don't have cash;
-- 1 partner dies without a will and life insurance, has adult and minor children and spouse, all of which want his equity from the house, but 2 remaining partners do not have any cash;

---

I would consider all of these as realistic problems that arise. Therefore, considering you say it's an all-cash purchase, I fail to see the downside in doing the legal part correctly from the get-go.

All of your other questions would be answered by whatever legal structure you settle on.