Real Estate Limited Partnerships - Why Invest? By Steve Gillman At Isnare.com Ezine Articles

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.

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