Co-buying a home, but only one buyer will live in home + part will become a rental

I am interested in purchasing a home in Austin, TX with my brother -- splitting the purchase, eventual rental revenue and proceeds, etc. 50/50. The lot the home is zoned to be able to add a back house, so the ultimate plan is to build the back house on the property then rent out the main house. My brother would live in the main house while the back house is being constructed, and then he would move into the back house. After he moves to the back house, we will rent out the front house. I will not live in either residence, as I already own and live in a different home. I know we will need a loan for the existing home we want to purchase and then we will need a separate construction loan.

Because this will be fairly complicated in terms of order of operations (because this will require two separate loans loans, and because he will live in the main home for an unknown amount of time, etc.) and how payment arrangements should work between us (if he is living in one of the homes we buy together and I am not living in either one), I could use some guidance on a few things.

Three main questions I have:
1. What kind of contract do we need between each other to lay out all of the specifics and terms of this arrangement, especially given that he will be living in the residence and I will not?

2. Does anyone have a recommendation for a fair way to handle this (between my brother and I)?

3. If we ultimately rent out one of the homes to other people, do I need to get an LLC to protect my personal personal property from a liability perspective? At what point do I need to do that (before purchasing the home?)? Do my brother and I both need to do that? If so, separately or together as one LLC?

I assume we will ultimately need to work with a lawyer to draft the contract, but I'm trying to get more information before speaking with an attorney.

Please let me know if you have any guidance or follow-up questions. We will have to move on this pretty quickly, so any insight you can share is greatly appreciated.

kp03atx said:

I assume we will ultimately need to work with a lawyer to draft the contract, but I'm trying to get more information before speaking with an attorney.

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These are really questions for the local attorney that you consult with...

kp03atx said:

1. What kind of contract do we need between each other to lay out all of the specifics and terms of this arrangement, especially given that he will be living in the residence and I will not?

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A well drafted one. There isn't some standard form for this, if that is what you are thinking. Ideally you want a lawyer experienced with real estate partnership agreements to draft the contract for you. That way the agreement will address everything you need and should be drafted clearly enough to avoid issues later.

You may also want to have the contract reviewed by a tax attorney. There are particular tax provisions that should be included in certain partnership agreements, especially those in which the profit and loss allocations do not match the capital interests in the partnership.

kp03atx said:

2. Does anyone have a recommendation for a fair way to handle this (between my brother and I)?

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What is fair varies a lot from person to person. What you want to do is sit down with your brother after talking with the attorney to discuss in detail how you want the deal to work. For example, you want it to address things like what happens if one of you gets married, divorces, dies, or goes bankrupt. You want to cover the process of how it will work when one of you wants out. You want to work out how decisions get made when you disagree; this is particularly important if you each are going to have equal shares in this deal. You want to decide who takes care of the different things that need to be done: dealing with the tenants, arranging repairs, keeping the books and records for the partnership, getting the partnership tax returns done, etc.

kp03atx said:

3. If we ultimately rent out one of the homes to other people, do I need to get an LLC to protect my personal personal property from a liability perspective?

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It might be a good idea to form a LLC or LLP for the rental. You both could be members of the LLC or LLP. Ideally you'd want to do that before you start looking for tenants. Discuss the details with the attorney.

kp03atx said:

What kind of contract do we need between each other to lay out all of the specifics and terms of this arrangement, especially given that he will be living in the residence and I will not?

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People frequently ask questions like this, but I honestly don't know what folks mean by "kind of contract." You need a contract that says what you want it to say. Not to be presumptuous, but if you're asking the question in this way because you're hoping to find some sort of sample form contract by googling, that would probably be a very bad idea.

kp03atx said:

Does anyone have a recommendation for a fair way to handle this (between my brother and I)?

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What some anonymous stranger on the internet thinks is fair is not something you should be concerned about. You and your brother need to discuss what each of you thinks is fair and then try to agree.

kp03atx said:

If we ultimately rent out one of the homes to other people, do I need to get an LLC to protect my personal personal property from a liability perspective?

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We have no way of knowing what needs you have, but a properly organized and capitalized LLC might provide you with some protection in this regard. That said, the best way to protect your assets is by carrying proper insurance.

kp03atx said:

Do my brother and I both need to do that? If so, separately or together

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It would make little sense for each of you to obtain separate insurance, although his situation is different than yours since he will be living on the property. If I were you, I'd sit down with an insurance agent to discuss the situation and obtain his/her recommendations.

Tax Counsel said:

A well drafted one. There isn't some standard form for this, if that is what you are thinking. Ideally you want a lawyer experienced with real estate partnership agreements to draft the contract for you. That way the agreement will address everything you need and should be drafted clearly enough to avoid issues later.

You may also want to have the contract reviewed by a tax attorney. There are particular tax provisions that should be included in certain partnership agreements, especially those in which the profit and loss allocations do not match the capital interests in the partnership.

I'm definitely not looking for or assuming there is any sort of standard form for this, but I thought maybe something existed that could serve as a good foundation that could be modified and expanded upon. My main goal there is to be able to review what I can and learn as much as I can before meeting with an attorney. Thank you for the information.

What is fair varies a lot from person to person. What you want to do is sit down with your brother after talking with the attorney to discuss in detail how you want the deal to work. For example, you want it to address things like what happens if one of you gets married, divorces, dies, or goes bankrupt. You want to cover the process of how it will work when one of you wants out. You want to work out how decisions get made when you disagree; this is particularly important if you each are going to have equal shares in this deal. You want to decide who takes care of the different things that need to be done: dealing with the tenants, arranging repairs, keeping the books and records for the partnership, getting the partnership tax returns done, etc.

Thank you. This is super helpful. I thought of some of these as items that would need to be included, but definitely not all of them. In terms of fairness, of course this varies from person to person...I didn't phase my question effectively. What I should have said with regard to the subjective fairness part is, from just the financial/payment aspect, does anyone have a recommendation in terms of how the split/monthly payments could work for the person living in the residence vs. the person not living in the residence? It's just super complicated because of all of the possible scenarios and the fact that it will be different once the secondary residence is built, etc. I'll probably just have to talk directly to the attorney about this part. Thank you.

It might be a good idea to form a LLC or LLP for the rental. You both could be members of the LLC or LLP. Ideally you'd want to do that before you start looking for tenants. Discuss the details with the attorney.

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Thank you again. Also very helpful.

kp03atx said:

I am interested in purchasing a home in Austin, TX with my brother -- splitting the purchase, eventual rental revenue and proceeds, etc. 50/50.

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This is an incredibly bad idea. I suggest you google something like why you shouldn't co-own property with relatives. Read all the horror stories that we see every day on these legal websites.

adjusterjack said:

This is an incredibly bad idea. I suggest you google something like why you shouldn't co-own property with relatives. Read all the horror stories that we see every day on these legal websites.

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Once again Jack I disagree with you on this. Sure, the horror stories are you what you see on the forums because people only come to the forums when they have a problem. People don't come to the forums to simply say "hey, I had a real estate partnership with a relative and it went great." But in fact lots of them do work out great. The ones that end in problems are those in which the parties DID not carefully work out ahead of time how everything was doing to work and didn't put that into a solid partnership agreement. People go into business with other every day and lots of those work out just fine, so long as they do that upfront work of setting out how things will go. I've seen plenty of people over the course of my practice that have gone into business with relatives and did just fine. So while it certainly can go bad, it's not like that is a certain outcome by any means.