Group Investing — How to Purchase a Home with Friends or Family
Investing with friends and family makes sense for several reasons. For some individuals, the idea of putting a hefty amount of their net worth into a single investment seems risky, daunting or even impossible. For others, it simply offers a way to diversify their portfolios across more asset classes than if they were investing alone.
One of the best uses of a limited liability company (LLC) is to use it as a vehicle for families or friends to pool their money together for the purposes of investing. An LLC can invest in stocks, bonds, real estate and can even be used to start businesses.
The following are Awning’s recommended steps to purchase a property with friends or family through an LLC:
1. Choose your members
The first step is to choose the people you’d like to pool your money with — you will enter into at least one (and hopefully multiple) business agreements with them, and depending on the contents of your LLC operating agreement, there will need to be some form of unanimous decision making on things like entry and exits into different types of investments.
Together, you will also choose a name for your LLC.
2. Apply for an EIN (Employer Identification Number)
Your EIN will enable you to open a bank account, file for permits and licenses if needed and do things such as hire employees. The IRS issues EINs at no charge. You can learn more here.
3. File your LLC’s articles of organization
To legally register your LLC in the state you want to be home to your business, you must file articles of organization with that state. The information you need to provide depends on the state. If you have no preference, we recommend incorporating in Delaware.
4. Create an LLC Operating Agreement
An LLC operating agreement can be written with any number of provisions, decided by its members. For example, the operating agreement could forbid individuals from selling their shares of the LLC without the permission from the other members. Another provision of an LLC operating agreement could limit investments to certain types of properties, such as those built after a certain year, within a specific zip code or above a 5% cap rate.
5. Open a separate bank account for your business
To ensure your LLC’s finances are kept separate from your personal ones, you will need to set up a bank account specifically for your LLC. You can check some companies that can help you with that here.
Ongoing Compliance Obligations
After registering your business as an LLC, you will need to ensure it stays compliant. Every state has different requirements, but a few examples include:
- Renewing your licenses and permits
- Updating the local government in which your corporation is incorporated about major changes within your company (such as when you add members or members leave)
- Filing taxes, etc.
Form an LLC Through Tribevest
We have partnered with Tribevest to make investing with your friends or family easier. Tribevest helps you create an operating agreement, start a multi-member LLC, raise structured funding rounds, enjoy seamless FDIC business banking, and so much more, all in one place. Organize, pool, invest, manage, and build together for a small monthly fee.
Additional Information Regarding LLC’s
Getting a mortgage through your LLC
An LLC cannot qualify for a FHA loan or conventional loan sold to Fannie Mae and Freddie Mac.
Residential lenders don’t like to lend to LLCs because of the limited liability they offer. As a result, many lenders will only extend a mortgage loan to a small LLC or corporation if one of the stakeholders volunteers their own personal assets to back the debt, but this would be on a case by case basis. This means, the lender will report the mortgage on the person who uses their personal assets to back the loans credit report, despite the loan being under an LLC. Conventional lenders typically only allow four mortgages reporting on a person’s credit report and stop lending after that.
As a result, many individuals who use LLC’s to purchase homes will use commercial or portfolio lenders to finance their properties. Although interest rates might be higher by 1–1.5% on these types of loans, they are great solutions to finance their properties.
If you are looking for a lender that is right for you, reach out to your Awning advisor.
Taxes for LLC’s
One of the major advantages of using a limited liability company for your rental property is pass-through taxation. Each member of the LLC will claim their share of the income, not the entire income that the LLC earned that year. There is no separate income tax filing required at the business level, so you avoid the “double taxation” situation that can arise with corporate entities. Taxes are passed through the LLC to the members, who must complete a Schedule C, Schedule K, or Form 1065 with their income tax return.
You will also be able to take certain deductions on your taxes that you otherwise would not be eligible for such as utilities, repairs, maintenance, or dwelling insurance costs. If you operate your LLC out of a home office, you can also deduct your rent or part of your mortgage payment.
This article contains general legal information and does not contain legal advice. Awning is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.