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buying rental property with partner....

1,610 Views | 7 Replies | Last: 7 yr ago by treetop flyer
Matsui
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AG
Quote:


91AggieLawyer
2:04p, 9/27/12
L
AG

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?
DriftwoodAg
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I'm not a lawyer or CPA, but I would assume that you would probably want some kind of entity to own the house with a dissolution agreement mapped out. Expenses would get tricky if they come out of 2 different personal accounts. If it were me, I'd want a joint checking account for rent to go into with a buffer for smallish expenses. Then you could pay out a certain amount of profit each month to the partners
sir charles
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Matsui,

I purchased a rental with my BIL a few years back. Can provide some feedback on how we handled things. Feel free to shoot me any questions that you might have. chuckbr24 AT g m a i l
howdydamnit04
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I own a TH with my brother. At the end of the year I make a spreadsheet with all expenses and income. We split it 50/50 and each take a copy to our CPAs. Pretty easy actually. Pretty sure it's just another item on return and since I typically "lose" money after depreciation and break evenish on actual cash I've got a large credit building out there.

I'm sure it will be more complicated when we try to sell it in the future or if either of us has bad unforseen circumstances arise.
tburroughs
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Set up an LLC with your buddy. Protect both yourselves and your investment. When used right, an LLC protects you from all of the things mentioned above by 91aggielawyer.
Set up a separate bank account for the LLC, and DO NOT MIX the funds with your personal funds.

Its not about whether you trust your friend you are investing with, its about protecting both of your personal finances, from being sued.

If you have already bought the property, you can still set up an LLC, and "sell" the property to your LLC.

Feel free to PM me if you want more info.

SteveBott
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You cannot use conventional financing in a LLC. You most likely need a bank loan and will have to personally quarantee the loan anyway. May make sense if you are paying cash or use a 15 year term
BearJew13
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Make sure you have a good buy/sell agreement in place. We like to have it work so that if one party wants to buy or sell, whatever price the offer to buy or sell at, the other party has the right to decline and buy/sell at that same price. Keeps everyone pretty honest...
Agilaw
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Agree with many of the posters, set up an LLC. The Operating Agreement can spell out the basic and specific terms: membership interests; capital contributions; ownership of assets; distributions; taxes; management authority; liability of member; additional members; dissolution; liquidation, etc. Much better to set it up correctly in the beginning.
treetop flyer
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LLC. Covers divorce, death, capital calls, personal liability, etc.
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