Real Estate Limited Partnerships
- Why Invest?
Real estate partnership, when set up as
limited partnerships, have some clear advantages. As a limited
partner, you don't have to deal with any of the management problems.
You just hand over your money and wait for the profits. Disadvantages?
As a limited partner, you have no control - you just hand over
your money and hope the general partner does a good job.
You might like the idea of a real estate
partnership. It is an opportunity to invest in bigger projects
without having to learn as much and work as hard as you would
have to on your own. As a limited partner, you just invest your
money and reap the rewards.
Example of a Real Estate Limited
Partnership
Suppose you have $10,000 to invest. You
don't like the idea of being a landlord and dealing with tenants.
You just want a simple investment in real estate that has the
potential to make you a really good return in time.
At your real estate investor's club meeting,
you hear that a dozen or so members are going to pool their money
to use on a big project. John Q is the one putting the deal together,
and will be the general partner. That means he will make all
the decisions once you have invested your money. After hearing
his plan, you get on the list of potential investors, and wait.
Two months later John has found the right
deal. There is a piece of land in the middle of a growing town
that has somehow been left empty so far. John has talked to the
city officials and found that it can be split into six residential
lots. Lots in town are selling for around, $60,000, so they can
likely be sold for a total of $360,000.
The seller has accepted John's offer for
$142,000, which is contingent on the approval of John's partners
within the week. The seller has also agreed to take a down payment
of $40,000, with the balance due to be paid in a lump sum in
two years, with 8% interest. The proceeds of any lots sold before
that time will be used to pay the balance as well.
You and six others agree to the deal, and
a partnership agreement is drawn up. You will each put in $10,000,
except for John, who will substitute his expertise and time for
his contribution. The profit will be split equally seven ways.
The $60,000 is probably sufficient for the down payment, as well
as the costs of closing, getting a survey, and carrying costs.
If not, you have all agreed to contribute $5,000 more if necessary.
At this point it is all in John's hands.
He manages to get the property closed, surveyed, split, and ready
for sale in two months. The sales commissions will be paid out
of the sale's proceeds from the lots, so he has managed to keep
the costs within that $20,000 of cash (after the $40,000 down).
The lots sell slowly, but he gets close
to the asking price of $64,000 for each. All are sold within
the two years, for a total of $362,000. Closing costs, property
taxes, sale's commissions, interest on the balance due to the
seller, and all other costs came to a total of $48,000, paid
for from the partners cash investment and the proceeds of the
sales. Let's look at the numbers:
Purchase Price: $ 142,000
All Expenses : $ 48,000
Total Sales : $ 362,000
Total Profit : $ 172,000
Profit for each Partner: $ 24,571
This is a simplified example, but you can
see why you might want to get in on a deal like this. You may
not have the money or knowledge to have done a deal like this
yourself. But you risked just $10,000, and at the end of two
years you have $34,571 (your investment plus the profit). Now
find a million-dollar deal to get in on, and in a few years you
might have $100,000 in your investment account.
I first heard about this technique in a
book (sorry, but I forgot the title) which chronicled how the
author started with a $6,000 investment and made it into a million
dollars in about 12 years. He did it in just three steps. The
first two involved partnerships, and the last one he did on his
own.
Some of you reading this may have
noticed that in the example above, John didn't invest a penny.
He used his time and expertise instead, and made the same $24,571
profit as the rest. You can see that if you take John's role
that this is a way to invest with no cash. Of course, as the
general partner, if the partnership is sued, he could lose his
house and other assets, while limited partners could lose only
the $10,000 they invested. This is one of the big advantages
of a limited partnership.
Copyright Steve Gillman. This article was an excerpt from 69 Ways To Make
Money In Real Estate. Want to know the other 68 ways? Visit http://www.99reports.com/make-money-in-real-estate.html