A real estate limited partnership (RELP) refers to a limited partnership entity of one or more general partners and limited partners that focuses on investing in real estate by leasing and selling properties.
The Basics of a RELP
A RELP is controlled by the general partner who may be a real estate development firm or an experienced property manager. Outside investors usually finance the real estate project and get a share of ownership as limited partners. Limited partners normally lack any management control in the development of the real estate project and have the least exposure to risks that may arise from the real estate limited partnership.
As a business partner, the general partner manages the development of a real estate project. For instance, the general partner may use the money contributed by the investors to purchase undeveloped land so that it can be developed or sold for a profit. Therefore, the investors will have the potential for growth if the value of the development project or the land goes up.
RELPs are mostly involved in shorter-term developments and projects and don’t offer interim cash distributions. The high potential for capital appreciation is what makes it an attractive investment. The RELP investments are also not redeemable before a preset liquidity event. The investor, therefore, is normally in the limited partnership for the whole duration of the project.
A RELP is usually governed by the terms of a real estate limited partnership agreement. However, the terms of each RELP may be different. Most real estate limited partnerships are private and their securities are typically not listed on an exchange. This makes them difficult to value and trade.
Benefits of Real Estate Limited Partnerships for Investors
1. Limited Liability
Unlike general partners, the limited partners in a RELP usually have limited liability. This means that they aren’t responsible for the company’s debts. In the case that the RELP incurs any losses, the limited partners will only be liable for the amount of capital they contributed.
2. Limited Duties
Another great aspect of entering into a RELP is the ability to invest money without the need to participate in the everyday operations of the business. This makes it one of the most desired passive income investments for many investors. As a passive investor, your only responsibility is to invest funds for a particular period of time and wait for returns. The general partner, who is an active investor, is the one responsible for the management of the daily operations of the business. This concept is comparable to that of a stockholder investing in a public company. It is an attractive option for people who want to invest in real estate but lack the time.
3. Tax Deductions
Tax deductions are another advantage of participating in a real estate limited partnership. The limited partners usually have some tax-based incentives. For instance, they could pass tax losses and enjoy untaxed profits.
4. Financial Rewards
Limited partners have the opportunity to enjoy potentially profitable long-term investments. They have a good chance of getting a steady return and there is potential for high growth. The success of the real estate limited partnership can be assessed by its ability to make investment decisions that can bring strong returns. When the real estate sector is in its peak times, this type of investment can be very lucrative for all involved parties.
Risks of Investing in Real Estate Limited Partnerships
1. Lack of Liquidity
Investments in real estate limited partnerships are usually long-term investments which can continue for the period of a development project. It may not be possible to resell your investment if suddenly needed. Other investment assets like stocks can be cashed out relatively fast should the need arise. With a RELP, getting money back may mean waiting for the results of a property sale and the sharing of the profits the limited partner had rights to.
2. May Lack Diversification
Some real estate limited partnerships develop one specific real estate project or property. In case the development project doesn’t get completed or sold, some or all of the capital you have invested could be lost.
3. No Guarantee
Since the real estate market often fluctuates, there is no guarantee that the sale of the projects will be at a profit since development costs may be over the budget. It is important for you to ask about past successfully completed projects to get a sense of how the general partner works.
4. Government Permits and Approvals
Some RELPs may be lacking all the required zoning approvals and government permits needed to develop the land they own. Denial or delays in getting all permits and approvals can greatly affect the value of your investment.
5. Limited Influence in Business Operations
Limited partners who may want to have a direct influence on the investment strategy of the RELP many not be able to do so. Their limited influence in the operations of the partnership means that they have to put their trust in the general partners and hope for the best.
The Bottom Line
Buying an investment property is often stressful for some real estate investors because they may not know what type of property to go for. A real estate limited partnership with a reliable and experienced real estate investment company could be a lucrative option for those who want to invest without having to bother with construction, rent collection, maintenance, or property management.
It is a common form of real estate investing that has many benefits, including investment security, potential tax deductions, and financial rewards. Investing with little money is also possible with RELPs. However, it is important for limited partners to ensure that they do their due diligence on who they are partnering with because they will be passive investors. They need to weigh the potential returns of being in a RELP against the restrictions that they will face.