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It can be a great way to generate cash flow, capitalize on it, and take advantage of tax breaks. As a high income professional, this is a way to create a passive source of income that could completely replace the income from your day job.
However, it is not something that is learned in school and so we often see that it is asked
“What does it mean to be a limited partner in a syndication?”
To answer this question, it is 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 those who operate and manage the stake. In a syndication, the investment we are referring to is often an apartment building, office building, mall, or perhaps a warehouse.
You are responsible for the following basic tasks (list is not exhaustive):
- Identify and conduct full due diligence on the occasion
- Creation of a business plan
- Securing the loan and insurance policy
- Raising capital from investors
- Buying the property
- Implementation of the business plan, be it development, renovation, improvement, etc.
- Management of current tenants
- Tax return for the property
- Manage finances, quarterly updates, and distributions to investors
- Deciding when to refinance or sell the property
- Distribution of profits
Ultimately, the success of an opportunity rests on its ability to handle both the known and the unknown of investing in a real estate business.
A solid, skilled, and experienced general partner can both save a bad deal and make a good deal. An incompetent general partner can easily get good business.
In all fairness, their role is so important that your due diligence should primarily focus on a general partner’s skills. Do you have a good track record and do you think you can get your business plan done?
Depending on the type of loan and structure, the GPs may even be personally liable for any debts associated with the business.
What is a limited partner?
On the other hand, as a limited partner, you are investing your hard-earned money in the opportunity to own part of the business.
You are not involved in day-to-day business and therefore have limited voting rights in decisions about the investment.
Your role as a limited partner:
- Do proper due diligence before investing in any business
- Invest your capital in a deal
- Check the quarterly updates
- Watch out for bank deposits
- Submit the K-1 tax form to your CPA
A limited partner can also be referred to as a silent partner.
The advantage of a limited partnership is that you don’t have to put more time and effort into the investment beyond investing your capital. For someone looking for real passive income, this is as close as possible when investing in real estate.
The downside is that you have no control over business decisions. You need to trust the general partner to make the best decisions on behalf of the 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 debt problems, you don’t need to dig into your personal wealth.
It is important to understand your role as a limited partner in a real estate company and understand the limits of what you can and cannot control. The advantages come with disadvantages. It is therefore important to see how you, as a limited partner, can achieve your financial and personal goals.
As a limited partner in dozens of deals, I’ve found that it has enabled me to leverage the experience, knowledge, connection, and most importantly, the TIME of others to achieve my goal of financial freedom.