You might be thinking… what’s so great about being a “limited partner”? Even the word “limited” makes you think that it’s…well… limited. Oh you are wrong! I want to specifically talk about the 11 essential reasons why it’s awesome to be one! Plus, if you stick around to the end, I will reveal the one thing you really need to know about before you become one (I created a YouTube video on this, which you can watch by clicking here if you prefer video).
There are two primary roles in a real estate syndication… general partner and limited partner. I’ve been both, so I have good insight into this. A real estate syndication is basically when a number of investors pool their money together to purchase a real estate investment. I created a video explaining the concept which you can watch by clicking here.
A general partner (also known as a sponsor) is the individual who finds, acquires, manages and sells the investment. They do the work, bring the experience, and so on. In syndications, the investment can be an apartment complex, a retail strip mall, a warehouse, etc. I’ll be doing a separate video just on general partners, so stay tuned.
A limited partner is an individual who brings a certain amount of cash that’s pooled with the cash of others to acquire an investment property. Let’s learn about those 11 reasons starting with…
- Allows you to invest in areas with great promise. Perhaps you live in an area that you can’t afford purchasing a rental because the cost of homes is too high? For example, if you live the San Francisco bay area, home prices are out of reach for many people. It’s just too pricey and the numbers probably wouldn’t work anyway. Or, perhaps the area you live in just isn’t a good place to invest due to lack of growth or some other fundamental lack of a business case. Either scenario is a great reason why the limited partner path is probably a better option.
- You don’t have to manage the property yourself. No late night phone calls for an overflowing toilet! No dealing with resident issues, nothing. You rely on the general partner to hire professionals that do this for a living. You can rest sound asleep knowing that the investment is being taken care of by professionals.
- Diversification – Syndications allow you to diversify in several ways. It’s an effective way to diversify into real estate, but you can also diversify in terms of the type of asset. Apartments, industrial, etc. and also geography… Florida, Texas, Georgia, etc. By making multiple investments across a number of syndications, you are really diversifying your real estate investment portfolio, which is ideal.
- You can free up your time to do things that are important to you. You may be very busy with your primary occupation and don’t have time to work on something else. Or, maybe you just want to use your free time to spend time with family, take vacations and relax. Whatever you reason is.. Being a limited partner allows you the time freedom to do what you want without having to manage a real estate investment.
- Scale – Syndications allow you to acquire investments that are much larger than what you could do on your own. This lets you participate in investments like large apartment complexes, industrial warehouses, retail strip malls, and all sorts of lucrative investments that you simply couldn’t invest on your own.
- Liability – If you’re already wealthy, making money is often less important that not losing what you have. As a limited partner, your liability is limited to the investment you put in. This is a huge attraction for those with large net worths because it’s a safe investment in real estate that won’t expose you to risks you’d experience owning your own property.
- Lack of desire – Maybe you’re so busy with your primary occupation that you don’t have any desire to get involved in real estate. Or the idea of being in real estate is attractive but you have no desire to be an active investor. Being a limited partner is a great option.
- Can’t Find a Deal – Say you are an active investor and you just haven’t been able to find a profitable investment. Maybe your analysis doesn’t show any opportunities in your city? Perhaps brokers aren’t calling you back? Or maybe you’re just not pounding on enough doors? General partners that specialize in, say, apartments can utilize their relationships and experience to have success where other part-time real estate investors can’t.
- It’s much easier than being an active investor – Being an active investor takes a ton of work. Analyzing properties, making offers, arranging financing, acquiring a property, managing the investment… it’s a lot. Being a limited partner means that you just need to evaluate the general partner and the deal. It is some work to do this, but it’s much less than being an active investor.
- Professionals will outperform the amateur any day of the week. They find better deals, can buy larger deals and can run them much more effectively than a weekend warrior could.
- You utilize leverage. What kind of leverage am I talking about? Specifically it’s the sponsor’s knowledge, experience, access to deal flow, financial strength, team, market research, time, network and capital. Leverage is a fundamental tool that you get to use
So you stuck around to the end… kudos to you. I don’t believe in just sharing what’s awesome without also sharing a key consideration that you need to consider. That is liquidity.
Putting money into a real estate syndication essentially locks away that investment until you receive your investment back plus returns. This could be 3-6 years or more. If you are looking at this as a long-term investment (which is the mindset you should have), then it’s no issue but I do like to call it out.
So that’s it! What questions do you have? Is there another topic you’d like to hear about? Please write below in the comments.