Q: I might partner on 2 rental properties. In addition to a contract, which is better, a lien or being added to the deed?
An acquaintance of mine (I’ll call him Ted) acquired two rental properties, one in Baltimore City and one in Baltimore County. After Ted's original business partner fell through (due $ and COVID), Ted asked if I could provide the money to convert both properties into multi-unit dwellings and cover the mortgage payments until renters were secured. I’ll also be the one to manage both properties and cover payments during times of vacancy (I already have a couple of rental properties). In exchange Ted will split the rental income with me for the duration of ownership. If the properties are sold, I’m supposed to get half the profit.
Ted is the only one on the mortgage and deed of both properties. Besides a written contract, should I also secure liens on the properties to protect my financial investment (in the event of sale or something unforeseen) or should I simply also be added to the deeds since I and Ted are splitting the money 50/50 anyway?
A: A deed and lien (mortgage) have two distinct purposes and different sets of pros and cons. However, one can't deed a property over without getting approval of the existing mortgage lender and without paying the applicable transfer and recordation taxes.
A deed would make one an owner, which not only gives the presumptive right to 1/2 of the rental income and 1/2 of the sale proceeds, but also carries with it obligations. Those obligations are increased when the property is rented out. (for instance, the requirements to register the property, get necessary lead certs, fix code violations, etc.) In addition, one cannot just deed over property encumbered by an existing mortgage without getting lender approval.
A lien by way of a secondary mortgage doesn't give any rights to sales proceeds beyond what may be necessary to pay off the mortgage lien. A mortgage will typically involve recordation but not transfer taxes. It will necessarily be secondary to any existing mortgage (unless the primary lien holder agrees to subordinate which doesn't seem likely).
While having a documented interest would protect an investor, neither a deed nor a junior mortgage offer much help if the property is underwater or if the owner has existing mortgages, judgments, etc that wipe out the equity.
The above only offers very general legal information and is not intended to offer any legal advice specific to a particular situation. The precise facts of any given situation may affect how general principles apply. You are encouraged to get legal assistance with preparing any of the binding legal documents discussed. While this is not a promise to represent, I hope that it helps answer the general questions.
A: See a lawyer familiar with real estate and business before you agree to anything like this. Not enough information to evaluate whether this is a good economic deal for you, but that depends on Ted's equity position in the properties (FMV less debt owed). But he expects you to fund major renovations to convert two single family properties into multi-unit properties, assuming zoning permits this, AND to make his mortgage payments AND to cover vacancies (what, pay the him the missing rent), AND manage the rentals for him, and you only split the income? Doesn't sound like a great deal to me. But you will want more than a contract; you will want a lien position on the properties, otherwise he can refinance or borrow more of the equity out of the properties until there's no equity left after you pay to renovate and make them worth more money. Plus, with multi-unit rental involved, the property would be better off titled in the name of an LLC which both of you own, thereby shielding you from personal liability should something happen to any of the tenants (a death caused by fire from faulty wiring, e.g.), and further guaranteeing you at least equal control over the operation of the business and its assets. With an existing mortgage this might be more difficult to achieve, but you should explore the options for forming an LLC. At the very least, you need a lien on the property (deed of trust) to secure your investment.
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