3 Reasons to Form Limited Partnerships for Real Estate Investments

May 10, 2022

If you’ve looked up real estate investing tips online and are thinking about buying an investment property, then a real estate partnership can be an ideal beginning point. These partnerships are limited joint ventures that focus mainly on real estate investments. They also allow investors to come together to financially support and manage their mutually owned venture. When investors form a limited partnership, it provides many benefits for them. However, it’s not a decision that everybody can make lightly and not everyone is suitable for real estate investments. If you are interested in forming a limited partnership for your real estate investment, then you should make sure to research some real estate investing tips beforehand.

What Is a Limited Partnership? 

A limited partnership, also known as real estate limited partnership (RELP), is an investment strategy used when a group of investors come together and invest their money in a real estate property for either developing, leasing, or purchasing. However, there are certain things you should remember to keep in mind when you want to form a limited partnership. A partnership or partner driven real estate investing is a business that two or more people own, each of whom make a valuable contribution to the business, such as:

  • Property
  • Money
  • Labor
  • Skills

Before you decide to go into a limited partnership, it is important to know what the two different partner types are.

General Partners 

General partners in partner driven real estate investing there are usually one or more partners who engage in the daily management of the company and are considered the owners of a property. Each has a responsibility to the property on a day-to-day basis and also face full personal liability for things like the:

  • Maintenance
  • Legal Debts
  • Events

However, it is also important to keep in mind that when you enter a general partnership with another investor, if one of you fails, then the other one fails, too. This is one of the risks you have to take into consideration before you form a limited partnership with another person.

Limited Partners 

If you’re looking to form a limited partnership in partner driven real estate investing, it is important to remember that these investors play a much more limited business role in the property you own together. The type of investors in limited partnerships for real estate investments are commonly known as “silent partners,” or “passive investors,” and generally contribute their money to the company, while taking a share of the business’s profit for themselves. Although they don’t typically engage in the daily management of the business and like corporation shareholders, these limited partners are only liable for obligations and debts they invested in the business themselves. This type of partnership could potentially be beneficial in a limited partnership for real estate investments, because it protects all parties involved.

The Three Benefits to Using a Limited Partnerships for Real Estate Investments

When you’re researching real estate investing tips and trying to determine if limited partnerships are right for you, you should consider following these reasons why limited partnerships for real estate investments is a wise choice:

1. Personal Asset Protection from Lawsuits

Like with any business transaction, your vulnerability should be your main concern when it comes to real estate investment. When you own property in a general partnership, or as an individual, it creates unlimited liability and a lot of responsibility for you to keep up with. You or your partner could either be sued for both real, or imagined complaints, or possibly go bankrupt By using a limited partnership (LP) or limited liability company (LLC) for real estate investments, you could potentially avoid personal liability for any damages that occur on your property. However, the liability is limited to the extent of your LP’s or LLC’s assets, and you’ll benefit from the protection provided by limited liability should anything go wrong on the property.

2. More Affordable Property Transfers

A limited partnership will offer many benefits for you, especially if you’re transferring the property to your own personal use, or to one of your LLC members or LP partners. With this type of transfer, you won’t have to deal with incurring taxes, and you’ll learn how to do this through researching real estate investing tips. While other entities might offer limited liability, partnering with them can result in tax consequences for you, which makes an LP or LLC a more preferable option.

3. Avoid Double Taxation

Another reason why limited partnerships for real estate investments should be considered is because it gives you the ability to avoid double taxation or reduced taxation on appreciated property as one of the owners. While a corporation’s structure may be more familiar to you, when it comes to real estate investments, corporations aren’t a desirable option. If you hold real estate in an LP or LLC, and then you decide later on to sell the property to a third party, you’ll be able to profit more from the tax benefits of using a limited partnership than you would if you partnered with a C-corporation.

When Are Limited Partnerships Useful? 

Limited partnerships for real estate investments are more popular with certain types of business entities (particularly LLCs and S-corporations) than they are with small-business owners. Here are some situations where limited partnerships in partner driven real estate investing are common:

#1. Family Businesses 

A lot of family-owned businesses have one or two family members as  general partners, each with designated management duties. Other members of the family are sometimes considered as limited partners and share only in the profit of the business. The management responsibility, in most cases, eventually passes on to the younger generation of the family, who inherit the family business. 

#2. Professional Businesses

In a professional industry, like a law firm or doctor’s office, senior members may want to maintain limited partnership involvement long after they retire. They’ll surrender company investment management control to the business’ general partners, while still profiting from the company. This gives you the freedom and security as the general partner to operate the business freely.

#3. Commercial Real Estate Projects

Limited partners often invest money in bigger commercial real estate projects, such as apartment complexes and shopping malls. They receive financial benefit from the project-generated income of the business, while still having a general partner designated to look after the company. If you are interested in starting a commercial real estate project, reach out to one of our professional investors at EXtrance to see how we can help you invest in profitable commercial real estate.

Estate Planning

Limited partnerships are also often used as estate planning tools, where general partners will hold a piece of real estate on behalf of an heir. The heir’s income is produced through the estate managed by an LP or LLC. However, it is possible the heir might eventually want to purchase the real estate in their own right, expanding their current assets. This also provides an opportunity for the standing LP or LLC to further extend their services towards the heir’s other real estate investments.

Starting a Limited Partnership 

If you’re looking to form a limited partnership, then you’ll need to file a limited partnership certificate with the secretary of state office in your state. This limited partnership certificate for your partner driven real estate investing business contains certain basic information about your business, such as:

  • Your business’ name (it will usually end in “Ltd.” or “Limited”)
  • The business’s registered agent accepting legal documents on behalf of the business
  • The name and address of all general partner
  • The signature of every general partner

Once the Certificate of Limited Partnership is filed, you’ll get together with your other partners and draft up a partnership agreement. However, this isn’t legally required, and you don’t file it with your state, but it is still extremely important to do, because this type of agreement gives you a blueprint to operate the business. It lays out each partner’s responsibilities and rights, should there be any future conflicts. 
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