Real Estate Limited Partnerships: More Thoughts on Why It’s Beneficial

By | October 10, 2012

It was about a month ago that I decided that I wanted to invest in a real estate limited partnership. As it turns out, last night I was reading a book on home buying and happen to jump to the back of the book where it offers a list of to-do’s when it comes to real estate investing as well as a list of things not to do. I was surprised to find that real estate limited partnerships on the list of things to avoid when it comes to real estate investing. I couldn’t believe it.

I had just sent the check of the parternships the day before and now it had me wondering if I made a huge mistake. Here’s a look at the reason it gave for avoiding real estate limited partnerships:

Real estate limited partnerships often come with large commissions for the general managers. This takes away from the actual profit that is then distributed to the limited partners.

While that is a rough paraphrase, the concept is the same. This book was advocating against limited partnerships because of the managing fees. Before I get into why I think this is okay, let’s go over some of the disadvantages of investing in a real estate limited partnership:

Disadvantages of a Real Estate Limited Partnership

Limited partnerships offer several disadvantages to other types of investing:

  • non-liquid investment – Unlike other types of investing, a limited partnership is often non-liquid for a certain number of years. This means that you can’t pull your money out at any time. Unlike my investments in the stock market, I am stuck in this investment.
  • No Control over Investment Money – As a limited partner, I have no say whatsoever in how decisions are made. The only decision that I have is the initial one to buy into the company. This means that I am at the mercy of the managing partners. If they make a huge mistake, it is going to cost me as well.
  • Management Fees – The other disadvantage to this form of real estate investing is that a part of the profits are paid to the managing partners. If I were to invest in real estate on my own, all of the profits would go directly to myself. By investing in a limited partnership, I am giving up a portion of the profits.

Why I think It’s Worth it

While there are several disadvantages to investing in this limited partnership, it’s not that much of a loss. Here’s why I think it is still worth it:

No Time / Effort Involved

While other investments (especially online ones) require some active management on my part, this one will require no time requirement of my own, other than to receive the quarterly “dividends”. This is a huge benefit! Not only do I not have to spend any time doing it, I also don’t have to learn how to be successful as a landlord.

This includes everything. From finding the right property to buy, the actual process to buy it, collecting rent, and the much needed maintenance. If there were a maintenance issue, I would have to get quotes from contracts (because I don’t know how to fix it myself), fill out the construction contracts, and supervise it all. To sum it up, it’s a lot of work.

Now, if I were fair, I could choose to invest in a property and then have it managed and maintained by a property manager. But, this would cost just as much as I am paying in fees for the limited partnership. By participating in the limited partnership, I am able to leverage my money to buy more properties, which is more property value susceptible to inflation, which equates to a higher profit.

In other words, regardless of how I do the math, I come out on top – and that is without considering the market that the limited partnership is located in that seems to be perfect for investors right now. While it may limit some of the profit that I could make if I were managing the property myself, when you factor in the passive aspect, there seems to be no better way to invest in real estate.