As I just announced a couple days ago, I am going to be investing in a real estate limited partnership. For those who don’t know how a limited partnership is or how it may benefit you, here’s a brief overview of what I am jumping into.
What is a Limited Partnership?
According to Entrepreneur.com, a limited partnership is:
A limited partnership is similar to a general partnership except that it has two classes of partners. The general partner(s) have full management and control of the partnership business but also accept full personal responsibility for partnership liabilities. Limited partners have no personal liability beyond their investment in the partnership interest. Limited partners cannot participate in the general management and daily operations of the partnership business without being considered general partners in the eyes of the law.
Basic Features of a Limited Partnership
There are some basic features of a limited partnership:
- 2 Classes of partners: limited partners and general partners
- General partners are the ones managing the organization
- Limited partners are basically financial investors, who have absolutely no say on the day to day operations
- Limited partners are also not liable for anything other than their initial investment.
- Limited partnerships have tax-through taxation, meaning that each partner is taxed for on the next income distributed to them
- The income gained as a limited partner would not be subject to self-employment tax
Benefits of a Real Estate Limited Partnership
While I have already pointed out some of the benefits for me personally to invest in this real estate limited partnership, there are several benefits for investing in a limited partnership:
- Ease of borrowing money in order to leverage our capital; Lenders are more likely to lend 85% of the property value if we have a larger pool of investments. This means the partnership can acquire more property faster while the market is ripe.
- Passive Income Stream – As many of my loyal readers already know, I love the idea of creating multiple passive income streams. As a limited partner, not only am I not liable for any of the partnership’s debt, but I don’t have to do any work. While I may stretch the definition of passive for other things like blogging, this one is truly passive.
- Tax Benefits – Another benefit of investing in a limited partnership is the tax benefits – I avoid self-employment tax on the income and build up a percentage of the capital gains as the money is leveraged and property values inflate.
The limited partnership structure is very attractive certainly. But it all depends on the managing partners, since the limited partners won’t have much if any influence on operations. Choose carefully.
I think that is a great idea if you general partners are good at taking care of things and being done on time. Did you know them personally? How did you go about finding a deal? We have a partnership right now where we are investors in a property and the other partners are renovating and selling it. We will then split the profits. We really don’t have to do anything but do have a say in what happens with the property, so I guess we aren’t truly limited. I will write about my experience when it’s all said and done. Good luck. I love passive income as well.
I’m with W. Seems like you’ve done your homework though with this guy so just be wary and make sure you ask for updates. You can’t influence the partnership but you can ask for updates.
[...] Estate – This option is probably my most passive investment, since I am investing in a limited partnership. My time requirement is literally zero and I am expecting some great long-term results. I think it [...]