Most people who express an interest in passive real estate are interested in both the risk-adjusted returns that real estate can offer and the passivity of letting someone else do the heavy lifting.
Who is performing the active component of the project in a syndicated real estate project? That would be the general partner (GP) or general partners.
As an investor, you become a limited partner (LP) in the project. There are additional differences between the two beyond who does the work, including who bears the most risk and who stands to benefit the most, and this will vary from project to project.
Dr. Peter Kim expands upon these roles in this Saturday Selection that originally appeared on Passive Income MD.
It can be a great way to create cash flow, profit from appreciation, and take advantage of tax benefits. As a high income professional, it’s a way to create a passive income source that could completely replace the income from your day job.
However, it’s not something you learn about in school, and so we often see it get asked,
“What does it mean to be a limited partner in a syndication?”
In order to answer this question, it’s important to understand the structure of a typical syndication.
There are essentially two parties involved – the General Partners (GPs) and the Limited Partners (LPs).
Who are the General Partners?
The general partners are the ones operating and managing the investment. In a syndication, the investment we’re referring to is often an apartment building, an office building, a retail strip center, or maybe a warehouse.
They’re responsible for the following basic duties (not an exhaustive list):
- Identifying and doing the full due diligence on the opportunity
- Creating a business plan
- Securing the loan and insurance policy
- Raising capital from investors
- Purchasing the property
- Implementing the business plan, whether it’s development, renovations, improvements, etc.
- Managing current tenants
- Tax reporting for the property
- Managing finances, quarterly updates, and distributions to investors
- Deciding when to refinance the property or sell
- Distributing profits
Ultimately the success of an opportunity rests on their ability to navigate both the known and unknown of investing in a real estate deal.
A solid, capable, and experienced general partner can both salvage a poor deal and hit a home run with a good deal. An incompetent general partner can easily tank a good deal.
Honestly, their role is so important that most of your due diligence should be solely focused on the abilities of a general partner. Do they have a good track record, and do you believe that they can deliver on their business plan?
Depending on the type of loan and the structure, the GPs might even be personally liable financially for any debt involved in the deal.
What is a Limited Partner?
On the other side, as a limited partner, you invest your hard earned money for the opportunity to own a piece of the deal.
You will not be involved in the day-to-day operations, and therefore have restricted voting power when it comes to decisions involving the investment.
Your role as a limited partner:
- Do the proper due diligence before investing in a deal
- Invest your capital into a deal
- Review quarterly updates
- Look out for bank deposits
- Hand the K-1 tax form to your CPA
A limited partner might also be called a silent partner.
The benefit of being a limited partner is that beyond investing your capital, you’re not expected to put any more time and effort into the investment. For someone looking for true passive income, this is as close as you can get to it investing in real estate.
The downside is that you don’t have the control over business decisions. You have to trust the general partner to make the best decisions on behalf of investors.
To be clear, as a limited partner you are not liable for any other capital beyond your initial contribution. So, if the investment has issues with debt, you won’t have to dip into your personal assets.
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Summary
It’s important to understand your role as a limited partner in a real estate venture and the limits of what you can and cannot influence. The benefits come with drawbacks, so it’s vital to see how being a limited partner can help you accomplish your financial and personal goals.
As a limited partner in dozens of deals, I’ve realized that it has allowed me to leverage the experience, knowledge, connection, and, most importantly, TIME, of others to accomplish my goal of financial freedom.
There are two ways to get an education—go to college or become a limited partner
Can we get a post on the exact tax benefits? I have a hard time finding info and understanding how to analyze it. Im a high income w2 earner….would i be able to deduct enough to make it worth it? What about in comparison to active investing in a home or multifamily?
You’ll find more information here.
Depreciation can be used to offset what the government considers to be passive income, like rent collection, for example..
As a high-income W-2 earner, unless your spouse obtains REPS (real estate professional status), depreciation will mostly carryover and be used to offset the depreciation recapture tax when you sell the investment / property.
PIMD has more articles on his site that may better answer your questions.
Cheers!
-PoF