When you want to invest in real estate but don't want to take on all of the risks, you should consider investing in a real estate limited partnership (RELP). This type of partnership involves gathering funds and assets from numerous investors before buying, developing, and selling properties. While there are some clear advantages of investing in a limited partnership, you should understand what this investment entails before putting your money towards it.
What Is a Real Estate Limited Partnership?
As mentioned above, a real estate limited partnership is created when multiple investors pool all of their investments together to purchase, lease, or develop real estate. A RELP is considered to be a type of real estate investment group. Because this group has a limited partnership status, it will consist of one general partner who must take on full liability for the investments the partnership makes. There will also be at least one limited partner who will be liable up to a certain point. This liability equals the amount that the limited partner has invested.
In most cases, the general partner will be a reputable property manager, a real estate development firm, or a corporation. All limited partners are considered to be outside investors who offer a specific amount of financing. In return for this financing, the limited partner will receive an investment return. Real estate limited partnerships are able to invest in an array of different properties to create a diversified portfolio.
How the RELP is structured will determine the amount of involvement each partner has in the investment. If you decide to enter into a limited partnership with other entities, it's essential that you read the partnership agreement in full to identify how partner voting, minimum investments, distributions, and fees are handled.
It's possible that the partnership you enter into will take a more collaborative approach with their investment decisions, which means that limited partners would have a say in the types of investments that are made. It's more common, however, for only a small number of executives in the RELP to manage investments and identify the next investment opportunities.
Your ability to invest in a RELP largely depends on your total assets and the amount of investment experience you have. Many of these limited partnerships focus on institutional investors and high-net-worth individuals. It's also likely that the limited partnership will require you to have accredited investor status. If you don't yet have this status, you should be able to find a limited partnership that doesn't have this requirement.
Main Considerations to Keep In Mind
Before you invest your money in a limited partnership, there are some considerations that you should take into account. For one, the majority of limited partnerships have very narrow focuses in the types of investments they make. It's possible for a limited partnership to solely make investments in high-value commercial properties or retirement developments.
Keep in mind that the minimum investment requirements for a RELP can be anywhere from $5,000-$50,000. Higher investments will come with larger potential returns. Even though these partnerships have the potential for high returns, they can also be very risky. Doing your due diligence before making the investment should reduce the risk of choosing the wrong partnership to invest in.
Pros and Cons of a Limited Partnership
The primary advantages of investing in a limited partnership include:
- Partnerships allow for higher returns
- You'll be able to work with other investors and real estate professionals
- Flexibility in how you invest
The main drawbacks to investing in a limited partnership include:
- Returns aren't always liquid
- You and your partners may have different investment goals
- Your returns may not match your responsibilities
