Like all real estate investing, wealth has traditionally been the prerequisite to becoming a limited partner (LP) in cash flowing real estate deals for two main reasons. First, buying real estate is very expensive; second, partnerships in real estate cipf-es.org deals involved the sale of securities and were until recently, for legal reasons, only open to accredited (real wealthy) investors.
With changes in the law and emerging crowdfunding platforms specializing in real estate like Invown, even non-accredited investors can become LPs in substantial real estate deals. This article will explain the benefits of being an LP investor in real estate and why smaller, non-accredited investors should consider it an option. At the outset it must be noted that investing involves risk up to an including the loss of the entire investment and like all private investing, LP investing in real estate is considered highly speculative and risky.
The general partner (GP) – limited partner (LP) Structure
In the GP – LP structure for real estate investing, the GP is responsible for finding and acquiring the property, securing financing, and managing the day-to-day operations while LPs provide capital.
Tax Benefits and Leverage as an LP
One of the advantages of owning a real estate investment is the tax benefits it provides. Depreciation, for example, allows investors to write off a portion of the property’s value each year, effectively reducing their taxable income. Owners can also use any losses incurred by the investment to offset other income, reducing overall taxes.
As an LP in a real estate deal, you also take advantage of these same tax benefits through your K-1 form. A K-1 form is a tax document issued to an LP by the GP, outlining their share of the partnership’s income, deductions, and credits. As an LP, you get the same tax benefits as a GP in the deal without having to take on the responsibilities of directly purchasing and managing the property.
Leverage is another powerful tool real estate investors use to generate more significant returns. Leverage is using borrowed money to increase the potential return on investment. In real estate, leverage is often achieved by taking out mortgages to aid in the purchase of a property. As an LP, your investment is also leveraged.
Cash flow as an LP
Real estate is often a cash-flow-generating asset class, and LPs receive distributions based on their share of the cash flow generated by the property. Getting regular cash flow, in addition to any asset appreciation, is one of the significant benefits of owning real estate.
The Benefits of an Experienced GP
The ability to harness the experience and expertise of the GP is another attractive quality of LP investing. The GP is responsible for finding the deal, getting financing, and managing the property throughout the investment lifecycle. Having an experienced GP do the heavy lifting is often preferable to a novice investor trying to do it independently. A professional and trustworthy GP has the knowledge and expertise to make informed decisions, negotiate better deals and manage the property to avoid pitfalls and generate better returns.
Unlocking the Potential of LP Real Estate Investing for All
Thanks to changes in regulations such as Regulation Crowdfunding (Reg CF) and the JOBS Act and the emergence of crowdfunding platforms like Invown, smaller non-accredited investors can now take advantage of LP real estate investments. This opens up new opportunities for individuals to invest in real estate and earn significant returns without having to take on the responsibilities of purchasing and managing the property themselves.
In summary, being an LP in a real estate deal has many of the same tax, leverage, and cash flow advantages as directly owning real estate. Investing as an LP also provides an opportunity to share the benefits of the investment without taking on the day-to-day management responsibilities. With the emergence of new laws and new platforms like Invown, non-accredited investors can now access these opportunities and benefit from real estate investments.
Please note that this article is for educational purposes only and should not be taken as legal or investment advice. The information provided in this article is not intended to be a substitute for professional legal or investment advice. ALL investing involves risk up to an including the loss of the entire investment amount and this is also the case with LP investing in real estate. If you have any questions about the information provided in this article or are considering investing, you should consult a lawyer or a registered investment advisor. The author and publisher of this article do not assume any responsibility for any actions taken based on the information provided in this article. It is the reader’s responsibility to conduct their research and due diligence before making any investment decisions.