What is a Limited Partner?
What is a Limited Partner?
When it comes to real estate investments, there are three types of players: the Limited Partner (LP), General Partners (GP), and Developers.
The LP is the passive investor with capital that provides funding for a project or property. They usually don't have any day-to-day involvement in managing the property, but they will be entitled to their share of profits once the General Partners pay all syndication costs.
How are Limited Partners Different from GPs & Developers?
The GP is the active co-investor who will put their money towards buying, developing, and managing the property. They are responsible for all the legwork, so they could be considered higher risk than usual than LPs.
The developer is often an external third party that operates separately from the other two investors. A developer provides services for both the GP and LP.
What's Special about the Developer's Role?
The developer usually doesn't have any monetary involvement in the deal. Still, general, and limited partners expect developers to handle the construction of the project or property until the process ends.
Sometimes these titles are combined with multiple roles depending on the syndication project needs during each phase of development or the building process.
What Does the Term "Limited" Mean in a Syndication Deal?
Because the LP is a passive investor, they are often referred to as "limited" in their role. Being "Limited" means that LPs don't have much control over day-to-day decisions or actions during the building process.
While general partners assume more risk and have an active role in the syndication deal, passive investors are just funding the project.
Limited partners usually only receive rewards with a portion of the profits once the principal pays development costs, even if the LP retains management rights to their share.
The critical thing for LPs to remember is that while there may be less risk, you aren't guaranteed any dividends due to your lack of involvement beyond fund management.
However, being a "limited" partner does not refer to your projected returns as an investor and only references the "limited" involvement in the real estate syndication process.
Do Limited Partners Interact With One Another?
Typically, LPs don't interact with other limited partners. Instead, they act as passive investors who pool money together to fund a real estate syndication deal.
Limited Partners generally receive passive income, which pays investors for the risk of a deal failing.
The return on investment for an LP depends on the deal's fixed rate of return, typically solidified in the deal's purchase and sale agreement.
LPs usually don't have much involvement beyond this basic process unless they specifically obtain management rights to the property.
Do Limited Partners Ever Participate During the Lease-Up Process?
Sometimes, if LP investors retain management rights to their share, they can participate when units within the building are either occupied or leased up for the first time. However, most LPs don't participate in the management of the syndication deals they join.
Limited partners could choose to retain management rights if they want to be more involved with building management, especially before it reaches full cash flow. Most LPs, however, have passive involvement in the deal.
How Do You Calculate Your Return on Investment (ROI) as a Limited Partner?
ROI is typically expressed in terms of annual return on investment or stated as a percentage-based rate rather than an actual amount. You can calculate revenue minus operating expenses and taxes over time, also known as net cash flow.
The time it takes for an LP to receive their total ROI often varies depending upon the success of a syndication deal or building. The higher the revenue and occupancy, the sooner an LP may begin to see profits from their investment.
How is a Limited Partner Different from Investors Who Buy REITs?
REIT stands for Real Estate Investment Trust and is like having ownership in a real estate development or syndicated project.
But there are some key differences with owning actual commercial apartment buildings compared to stocks. There is more risk involved with investing as an LP because you aren't guaranteed dividends as you would as a REIT investor.
REIT dividends are usually a fixed percentage of a property's gross income. Still, LPs don't usually receive any additional return beyond what the principal outlines in the purchase and sale agreement.
In Summary
Being a Limited Partner in a syndication deal is an excellent way for an individual to participate in a real estate investment transaction without hands-on management of the agreement.
While many people are involved in real estate syndication deals, LPs are passive investors who reap the benefits of owning stakes in multifamily developments.
The return on investment for an LP depends upon the purchase and sale agreement, which can be expressed as a fixed rate or percentage-based ROI and varies with each deal.
Are you ready to learn more about being a Limited Partner? Start your investing journey by contacting the Thomson Multifamily Group and joining our Investor Club.