This article is part of our passive investors guide on real estate syndications, available here.
The answer essentially comes down to managing every aspect of an investment versus throwing your support behind a project to get dividend payouts. As real estate syndications continue to perform strongly in inflationary environments, they are increasingly used as stock alternatives among diversified investors. After reading this article, you’ll know the roles of general and limited partners in making money through real estate.
Key Takeaways
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While a general partner puts together all aspects of a real estate syndication, limited partners have no active investor duties. General partners are sometimes called syndicators, sponsors, or operators.
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Limited partners infuse capital into risk-adjusted investment opportunities that have been put together by real estate sponsors. This setup allows limited partners to take a hands-off approach while earning rental income, offsets from depreciation, and potential ordinary income offsets.
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There is no maximum limit to the number of partners permitted in limited partnerships. However, limits may exist based on the partnership agreement. In some cases, state laws can place limits on partner totals.
What is a General Partner and a Limited Partner?
While a general partner (GP) puts together all aspects of a real estate syndication, limited partners have no active investor duties. General partners are sometimes called syndicators, sponsors, or operators. Their long roster of duties might include locating deals, underwriting, performing due diligence, managing daily operations at properties, building out business plans, and closing deals. They also negotiate with sellers, lenders, and brokers.
Limited partners have limited liability and are sometimes called passive investors because they take on passive roles after investing funds into properties. The benefit is that they get in on a stable, appreciating asset without doing any active real estate work. Returns are earned on either a monthly or quarterly basis. Next, I’ll go into the question of whether or not you can be both a general and limited partner.
Can you be both a General and Limited Partner?
Yes, running a deal on the general partner side is possible while acting as a passive investor. Any capital infused into a deal by a general partner is considered to be “limited partner funds.” Let’s take a closer look at what limited partners do to dispel any ideas of effort-free cash distributions seeming too good to be true.
What does a Limited Partner do?
Limited partners infuse capital into risk-adjusted investment opportunities that have been put together by real estate sponsors. This setup allows limited partners to take a hands-off approach while earning rental income, offsets from depreciation, and potential ordinary income offsets.
In many cases, the benefits earned from one limited liability partnership allow the limited partner to invest in more properties until they live fully on passive income.
How many Limited Partners can you have?
There is no maximum limit to the number of partners permitted in limited partnerships. However, limits may exist based on the partnership agreement. In some cases, state laws can place limits on partner totals.
Larger limited partnerships can be useful for smaller investors seeking a way to get in on large-scale commercial and residential investments. Let’s go back to ensure the differences between a general partner and a limited partner are clearly understood.
What is the Difference Between General Partner and Limited Partner?
The main difference between a general partner and a limited partner comes down to the level of participation.
Here’s a more detailed comparison of the core differences:
- While general partners take on personal liability for obligations related to the partnership, limited partners enjoy limited liability and protection of personal assets. A general partner may be personally liable and may not enjoy limited liability protection.
- General partners manage the day-to-day operations at properties and make most business decisions. Limited partners have no responsibilities or duties tied to day-to-day operations. A limited partner can earn monthly or quarterly income from a property they never see in person.
- Unlike general partners, limited partners do not pay self-employment taxes since they make passive income instead of earned income.
The “limitedness” of limited partners raises the question of just how much say limited partners have when it comes to how a property operates. Next, I’ll tell you if limited partners have voting rights.
Do Limited Partners Have Voting Rights?
The voting rights of limited partners can vary based on the specifics of a partnership. Generally, voting rights for limited partners are restricted using one of two methods. First, partners can decide how much voting power limited partners will have. This arrangement can look like everything from giving limited partners the power to vote on everything to allowing voting privileges on select issues.
Next, general partners can limit the impact of voting powers for limited partners based on each partner’s percentage of ownership interests. Another question to delve into is whether or not limited partners have directors.
Do Limited Partners Have Directors?
Limited partners are not required to have directors or officers because they are not corporations. However, some partnership agreements set up director appointments to help with the management.
The existence of a board of directors within a limited partnership does not alter the rights, responsibilities, or liabilities of general or limited partners in any way. Hearing about how large a limited partnership can get, raises the question of how many partners are needed for a partnership to be legitimate. Is there a limit?
Can a Limited Partnership have only one Partner?
The minimum number of partners for a limited partnership is two. To be considered a legitimate limited partnership, there must be two or more partners: at least one general partner with at least one limited partner.
Next, let’s start winding down by covering the core characteristics of a limited partnership before highlighting the benefits.
What are the Characteristics of a Limited Partnership?
A limited partnership involves two or more people with duties split between general partners and limited partners. While general partners handle all responsibilities of planning, funding, and managing a property investment opportunity, limited partners simply infuse capital in exchange for monthly or quarterly dividends.
In addition to taking on all of the “work” associated with operating an investment property, a general partner also takes on nearly all liability. Limited partners enjoy consistent payouts, unlimited personal liability, and opportunities for using deductions and depreciation to offset gains. The last thing I’ll cover is how everyone benefits from a limited partnership.
What are the Advantages of a Limited Partnership?
The main advantage of a limited partnership is that it opens up investment opportunities that would be unattainable for the “average” person. A large pool of passive investors can own part of a revenue-generating, appreciating asset without taking on heavy liabilities. Investors enjoy consistent dividends without any hands-on management.
Next, I’ll speed through some frequently asked questions people have about limited and general partnerships in real estate.
Frequently Asked Questions General Partners and Limited Partners in Real Estate
The advantage of being a limited partner is owning part of a revenue-generating, appreciating asset while getting tax perks for offsetting gains with no liability over and above your invested capital.
An LLC consists of owners instead of partners. In real estate investing, an LLC is frequently set up as the “general partner” in a limited partnership to avoid personal liability while maintaining the investor benefits of a limited partnership.
Limited partners can invest in properties to earn passive income without the need to manage deals, act as landlords, or handle finances.
What is General Partner and Limited Partner - Conclusion
While general partners do all of the “work” tied to an investment property, limited partners earn cash distributions by investing capital. Limited partners enjoy freedom and flexibility by not becoming bogged down with the day-to-day work of executing the project’s business plan and keeping a profitable and operational property.
As a result, they are free to work full-time jobs, invest in multiple properties in different markets, or spend their free time on hobbies. If you’re interested in getting access to private multifamily investment opportunities, join the investor club for insights into how investors are passively growing their capital while reaping the tax benefits of multifamily real estate syndications.
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