4 Most Popular Forms of Real Estate Partnerships
Developing a real estate project is going to cost some serious bucks. Rather than one person taking all of the liability and responsibility, savvy investors organize partnerships. These give people the chance to pool resources, skillsets, and experience to complete a project.
Real estate is a little bit different from other industries, and has some unique ways for people to work together. Below are the 4 most common organizational structures for these kinds of partnerships.
1. Real Estate Investment Trust (REIT)
REITs give the small fish a chance to get involved with large real estate projects. These were first established by Congress in 1960 as an amendment to the Cigar Excise Tax Extension of 1960. The general preemies with this form of partnership is people are able to buy shares in a property or portfolio. There are actually 3 different ways to organize a REIT:
- Publicly Traded REITs (mREITs) – This is where you can buy shares of publicly traded REITs. This is almost exactly like purchasing shares of corporations in the stock market. Publicly traded REITs are listed on the national securities exchange and regulated by the SEC.
- Public Non-traded REITs (PNLRs) – These kinds of projects aren’t traded on the national securities exchange. These tend to be much more stable because they aren’t subject to changes in the broader market. They are also regulated by the SEC.
- Private REITs – These kinds of properties are completely privately owned. They are where you can purchase stock in a real estate project. Many times it might be an investment in an apartment or condo complex. Once you have enough stock in the estate, you can take up residence. We’ll talk about the specifics of this arrangement below.
The mREIT and PNLRs will only ever be investments. You’ll never purchase these kinds of shares with the anticipation of living in the properties. Private REITs are a lot different. Once you own enough of the stock, you can actually inhabit the structure. This might sound like a good idea, but there are a few things that can cause problems.
Private REITs are financed through one mortgage. When you purchase a condo, townhouse, or apartment, each unite has its own loan. If your neighbor starts missing his/her mortgage payment, it has no impact on your loan. In a private REIT, if other owners start missing payments, it will affect the whole group.
2. General Partnership
You need to be really careful with the general partnership. It is absolutely critical to know and trust your partners. General partners have unlimited liability. That means personal assets are liable to the partnership’s obligations. Say you have a general partner with a gambling problem. He loses all his money, and isn’t able to cover his portion of the business debts. You can actually be sued to cover the missing funds.
General partners are highly involved with the management of the business. While there is some risk that comes with this arrangement, there are also some benefits. When you structure a general partnership, you make up your own rules. You can control the operation has you see fit. Compared with a corporation, there is much less red tape and bureaucracy.
General partnerships will always have two or more people. There should be a formal, written agreement between all of the parties., and any partner can enter into contracts that will become the obligation of the entire group.
3. Real Estate Limited Partnership (RELP)
Limited liability partnerships are a very safe way to work with other investors. A person is only liable for his stake in the property. If there is unpaid debt, the worst that can happen is losing your investment.
If you own a small share in a property as a limited partner, you won’t be involved with the management or decision making. It will require non of your time to interact with other partners. You would have strictly made a financial investment in the hopes of seeing a strong return.
4. Real Estate Syndicates
The basics of real estate syndication are similar to two guys opening a club. One works as the manager and operator of the business. He is in charge of finding the right location, raising funds, and managing the day to day operations. The other is the group of investors. This group finances the project, and gets a return in the form of dividends until the investment matures. The “sponsor” or manager is responsible for 10 to 20% of the startup capital. The investors will come up with the other 80 to 90% of the funds.