How will a personal guarantee affect my net worth?
Currently looking at small multifamily reno.

Plan is to buy the property cash (with two family members), renovate, and raise rents. I'd like to create a partnership agreement, but keep them off the title because it seems cleaner/ I want 100% control of the deal. They're okay with this... we've done some single family flips together before.

Once the property is leased up, I'm planning on refinancing and returning capital to the partners.

1. Will this be a problem if the partners aren't on the title?
2. In general, should the partners be on the title if we aren't forming a separate entity?
3. If I sign a personal guarantee for 100% of the permanent debt, but only have a 1/3rd interest in the property, will this cause my net worth to decrease?
4. If I want to buy another deal, how will subsequent lenders view me if I have a 1/3rd interest, but am the only person on the title, and have a personal guarantee for a loan on a previous property?

Thanks very much!  


  
Edit: As several have suggested, an LLC is probably the cleanest entity to use... it's just that this is a small deal, *maybe* worth $300,000 at most once it's been renovated/ leased up. I think the annual LLC compliance and taxes alone will eat up a non-trivia portion of the cash flows. 
[{"id": "egtuuhf", "text": "Why no LLC?", "replies": [{"id": "egtvefh", "text": "It's a pretty small deal.  \n\n\nDon't want to deal with the compliance, annual maintenance, and LLC taxes", "replies": [{"id": "eguarp9", "text": "There are no LLC taxes.  All income, losses, depreciation, etc is passed through directly to your personal taxes via a K-1.  It is very cheap and you\u2019re taking an unnecessary liability if you were to get sued by a tenant.", "replies": [{"id": "egubaxl", "text": "There absolutely are state level LLC taxes and compliance costs (depending on the state)\n\nYou're probably right about the liability though. ", "replies": [{"id": "egubhyx", "text": "I have absolutely never heard of an LLC tax, but if that is the case, then just form the LLC in Delaware or any other state that doesn\u2019t have this tax.  It doesn\u2019t matter if the deal is $300,000 or $50,000,000 - if someone slips and falls, or the roof caves in and kills two people, you\u2019ll be personally liable for any and all damages.  That means that any of the plaintiffs could come after your house, car, boat, etc.  If the property is held in an LLC then you\u2019re limited to your investment in the LLC", "replies": [{"id": "egubp00", "text": "Maybe you're in a state where there are no LLC taxes. We have them in Ohio/ Kentucky. \n\nIf I go out of state, I'll have to pay someone to be a registered agent in that state- again, not much, but little costs like this add up... and it's more compliance pain in the ass. \n\nI know how LLCs work... I have several right now. I also know how easy it is to \"pierce the corporate veil\" of an LLC... I absolutely plan on having insurance regardless of whether or not the property is held personally or in a separate entity. ", "replies": [{"id": "egudi76", "text": "Well, that\u2019s your prerogative, but I cannot think of any good reason not to hold an investment property in a LLC besides wanting to save a very small amount of money ($10 - $25 per month).", "replies": [{"id": "eguonoy", "text": "I mean, a single family home might only cash flow $200-250/ month. $25/ mo is 10% of your CF... \n\n\nBut I agree... I\u2019m probably being penny wise and dollar foolish ", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "eh52800", "text": "Texas checking in.  Franchise tax on over $1m revenue.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "egtv1im", "text": "I'll try to hit these one at a time.  \n\n&amp;#x200B;\n\n1. This is not a problem for anyone unless you want them to sign on the note.  I'm not sure how a bank would look at guarantors who are not owners.  I suspect they'll be fine with it while being very confused as to why anyone would do that.  \n2. In general, yes, a partner should be on the title in the situation you describe for a million reasons but they all boil down to the fact that they have no legal right to the property if they aren't on title.  If you have a written agreement of some type, I guess that's fine but why not just use an entity.  \n3. Personal Guarantees have nothing to do with your net worth.  They are a contingent liability.  \n4. If you've signed in solido, they'll take into account that you have a contingent liability for the entire amount.  Even if your partners are all on the note, this won't change unless you go to a pro rata arrangement on the note.  ", "replies": [{"id": "egtvpcu", "text": "Okay, awesome. \n\nThanks for clearing that up.\n\nProperty fully renovated/leased up is MAYBE worth $300,000.  \n\n\nShould I just go ahead and set up an LLC, as others in this thread have suggested?  \n\n\n  \nThanks again!\n\n  \n\n\n&amp;#x200B;", "replies": [{"id": "egtw1y6", "text": "What state? What are the fees? How well insured are you? at 300k you could go either way depending on what the fees are in your state. ", "replies": [{"id": "egtybmz", "text": "Kentucky. LLET taxes are $175 but there\u2019s also compliance. Do most accountants charge more for LLCs than partnerships since an LLC is an actual entity?\n\n\n\nI don\u2019t have an umbrella policy right now but I get vacant home/builders risk for my flips. ", "replies": [], "depth": 4}], "depth": 3}, {"id": "egywgoa", "text": "Yes, you should set up an LLC", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "egtvbiq", "text": "Ill try to get the ball rolling on this with my two cents.  Take all of this with a huge grain of salt.\n\nYou'll want to create a single-purpose entity LLC and buy the property in its name using contributions from the partners.\n\n&amp;#x200B;\n\nAfter you have completed renovations and leased up the property, the LLC can get a new mortgage and the excess proceeds can flow through the LLC to the partners (just like operating income), if you so choose.  The personal guarantee won't affect your net worth but will affect your personal credit.  I would avoid a 100% guarantee if at all possible.", "replies": [{"id": "egtvyf7", "text": "Yeah I considered that. It does seem like a cleaner course of action.\n\nIt's a pretty small deal though ($300,000), so LLC taxes actually will eat a non-trivial portion of the cash flows. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "egu37ji", "text": "When you refinance to pull capital, you may only be able to pull around 65%.  Check this out before you assume otberwise.", "replies": [{"id": "egubdkw", "text": "Thanks for the heads up!  \n\n\nI underwrote for 65% LTV on the refi. ", "replies": [], "depth": 2}], "depth": 1}]