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Often investing in multifamily properties involves a partnership of two types of investors. Both are extremely important to the success of the investment.
I have been both. Both are great ways to access the amazing returns that multifamily properties offer to us. Which are you? Which do you want to be?
One is the General Partner (GP) who can be an individual or a group of people.
The General Partners locate the property, negotiate the purchase, perform the due diligence to make sure it is a promising investment, secure the funding, bring the deal to the closing in which the property is purchased, and then operate the business according to the plan.
As you can see, the General Partners are very active with this investment. They put a lot of time into it,
The other major partner is the group of Limited Partners (LP) who provide the initial private capital needed to secure the property. The group of Limited partners have different responsibilities.
The Limited Partners are sometimes called “passive investors” because they do not take an active role in operating the business.
Last week Mike explained the difference between Accredited and Non-Accredited investors who might be these Limited Partners. Take a look at his blog here:
https://www.attuneinvestments.com/2024/07/08/could-you-be-an-accredited-investor/
Without the Limited Partners, the General Partners would not be able to purchase the property. Without the General Partners, the Limited Partners would not have a property in which to invest or someone to do the day to day required by the investment. The General Partners frequently fall into both categories as they invest some of their own funds into the deal.
Let’s look in more detail at the two major types of partners in a multifamily investment, the pros and cons of each.
As stated above, the General Partners are the active managers of the investment. They do a lot of work simply in finding the property and pulling the pieces together to be able to purchase the property.
I still remember back several years ago when Mike Bocanegra, Mike Jacobson and I found Sabal Court apartments in Tallahassee. We spent two months confirming this was a good investment choice and producing the investment documents needed even to approach any Limited Partners. We then had conversation after conversation with people to see if this was a good fit for their investment. General Partners need specific skills and put in a lot of time.
Once it is purchased, the General Partners are responsible for the day-to-day operations, strategic decisions, and overall performance of the property. Typically, GPs have extensive experience in real estate and property management.
Mike, Mike and I worked the business plan for Sabal Court for four years. The first weeks were a blur of taking over the property, hiring property managers, implementing systems, and getting to know the property in detail. We faced the challenge of managing the renovation projects. Covid hit within four months of owning the property. So many decisions had to me made.
Although there may be a single General Partner, it is more common for there to be a team of General Partners, each with distinct roles, particularly on larger deals. This was our approach, working together as a team.
RESPONSIBILITIES OF GENERAL PARTNERS. GPs oversee property management, including leasing, maintenance, and tenant relations. Usually, they hire a third-party professional property manager to perform these duties.
They make critical strategic decisions, such as renovations and budgeting. Before the property is purchased, they secure the funding, which includes both a large loan from a financial institution and the capital needed beyond that large loan, which is provided by the Limited Partners.
This role demands a significant time investment and expertise to manage the property effectively.
PROS OF BEING A GENERAL PARTNER. One of the main advantages of being a GP is the significant control over the investment. GPs often receive a larger share of the profits, including asset management fees. Their hands-on involvement allows them to steer the property toward success.
This can be quite fulfilling for people with an entrepreneurial spirit, who have the time, and confidence needed to take on a syndication and follow through to completion.
The return on investment for a General Partner can be significant. In many ways it is trading time for dollars.When the investment is structured correctly and managed effectively the General Partners can benefit quite well for the investment of their time and skill.
CONS OF BEING A GENERAL PARTNER. However, GPs also face unlimited liability, meaning their personal assets are at risk if the investment fails. Even with what are called non-recourse loans there are still major liabilities, particularly on multi-million dollar properties. For example, most General Partners take seriously their responsibility to the Limited Partners for the money that they have invested in the deal.
The role requires substantial time commitment and expertise, which can be demanding and stressful. It is a job, requiring specific knowledge, leadership capabilities, skills, and constant attention.
Although very rewarding both financially and professionally, this is a big, serious job. Multifamily deals typically take 3 to 7 years to generate the kinds of returns that are expected. These are not quick, fix and flips. The real returns are long term in maturing.
I can speak of many “sleepless nights” as we faced major challenges in our Sabal Court property through the years.
As compared with the General Partners who are “active” investors, Limited Partners are “passive” investors who provide the capital needed for the investment but do not engage in its management.
They rely on the expertise of the GPs to handle the property’s day-to-day operations for the life of the investment.
RESPONSIBILITIES OF LIMITED PARTNERS. The primary responsibilities of LPs include capital contribution and performing their own due diligence on the investment opportunity and the GP’s track record. They need to evaluate the potential of the investment and be able to trust the management skills of the General Partners.
PROS OF BEING A LIMITED PARTNER. The benefits of being an LP include limited liability, which protects their personal assets. They can earn returns without being involved in the daily operations, making it a more passive form of investment.
This works very well for people who have full-time jobs or who don’t want the hassles of active management. The historic returns for multifamily investments have regularly come in higher than the stock market. There are risks, but the benefits can be significant.
We have a blog in which we outline five benefits of multifamily investments with the acronym IDEAL
CONS OF BEING A LIMITED PARTNER. The downside is that LPs have little to no control over management decisions. This can be frustrating for some individuals. Limited Partners must rely heavily on the GP’s performance for the success of their investment. This reliance can be risky if the GP does not manage the property well.
There is not a guarantee of either a return on the investment or a return of the investment. Remember, these are long-term plays, often 3 to 7 years.
The synergy between GPs and LPs is essential for successful multifamily property investments. GPs bring expertise, management skills, and strategic planning, while LPs provide the necessary capital.
Together, they share the risks and rewards, making it possible to undertake larger and more profitable investments than either could achieve alone.
We could not have done our Sabal Court investment without our 17 Limited Partners. Neither of us would have received the benefits of this investment without each other.
BALANCING OF ROLES. For a successful investment, it is crucial that both GPs and LPs understand their roles and work collaboratively. Effective communication and trust between GPs and LPs can significantly enhance the investment’s success.
The regular communications and transparency from GPs help reassure LPs and build a strong partnership.
Choosing between becoming a GP or an LP depends on your personal preferences, expertise, and risk tolerance.
If you have real estate experience, enjoy managing properties, and are comfortable with higher risk, becoming a GP might be a better fit.
On the other hand, if you prefer a more passive role and are looking to invest without daily involvement, becoming an LP could be more suitable.
Mike Jacobson and I are currently searching for properties that will provide excellent potential for those who wish to be Limited Partners.
Understanding the distinct roles of GPs and LPs can help investors make informed decisions about their involvement in multifamily property investments. Balancing control, risk, and potential returns is key to finding the right fit for your investment strategy.
By working together, GPs and LPs can create a successful and profitable investment venture that benefits both parties.
Investing in multifamily properties is not just about the financial returns; it’s about building a partnership that leverages the strengths of both GPs and LPs, ensuring long-term success and sustainability in the real estate market.
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Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.
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