I am new to investing and am trying to purchase a rental property (duplex or 4plex) in Texas.
I’m buying the property with my Dad and my brother. Everyone will put an equal amount down and my brother will more than likely live in a unit (since he’s in college, this will work out great for him).
Do we form an LLC or Corp? If we do, how do we secure financing? How do they check credit and such? Or do they check the credit on each member and then give the financing to the LLC??
This is a simple one. Place the property in a land trust and assign beneficiary interests in proportion to your contributions. Put your brother and other tenants in a triple net lease. Make sure your Trustee is a non-profit corporation.
As an aside, you are really asking for trouble going into a financial arrangement with your family. I would NEVER do this unless I had such protection as is afforded by a trust – and I still would probably not do it because of the bad feelings that would inevitably result in the event of a default. Good luck.
Thank you for your insight! This is a ton of help.
How would I go about setting up a Land Trust? And how do I find a non-profit beneficiary? Isn’t it hard to find someone that will rent on a triple net lease? I know that I probably wouldn’t have done that when I was renting…??
Also, I know that there is definitely a risk in doing business with family. However, I really want to get them started in real estate investing. I’m starting out…and I’m getting them to start out with me so that they feel there is less of a risk. After this first purchase, I’m hoping to buy another one in the same area by myself (so that my brother can manage my property as I will be out of state!).
Thanks for your advice and knowledge!
Would you have rented on a triple net lease in response to an ad like this?:
“I own a property in a land trust. I need someone to live in it for 3 years, make the payments on time, and take responsibility for maintenance and repairs. No bank or credit qualifying and no down payment. Just pay my closing costs and make 3 lease payments in advance. If you agree to this, I will make you an immediate owner of the trust, which entitles you to writeoff the mortgage interest and property taxes under IRS regulations. Best of all, I will share future appreciation with you.”
Your ad looks good, my question would be when you say “I will make you an immediate owner of the trust”, this statement sounds like they own the whole thing, so when do you tell them there are other owners?
The reason I ask is because when selling on a Contract for Deed, they also get the mortgage interest and property taxes to writeoff, no bank or credit qualifying and they are responsible for the maintanance of the property, this way they feel true home ownership.
Any improvements they make to the property are not shared with others from their labor and money invested, which would be an incentive for them to make improvements for their sole benefit.
I assign the tenant an immediate 50% interest in the trust, John, and everything is discussed upfront. The benefits of your Contract for Deed and the Land Trust are similar. With a land contract, however, transfer tax is due at time of sale.
By the way, I’ll call you tomorrow on that other matter.
I’m thinking about renting to University students. So they may not be as open to this scenario of a triple net lease. Should I still use a land trust to purchase the property?
If you are renting to university students, perhaps a freshman student would be your ideal. Many parents pay for their students’ housing and may relish the opportunity to get a good chunk of their money back in 3 years.