Our look at real estate investments concludes this week with Real Estate Limited Partnerships (RELP).
An RELP is most commonly used to develop a real estate property, or to manage completed real estate properties. To invest is an RELP an investor purchases securities in an RELP. How the RELP is managed is outlined in a limited partnership agreement.
An RELP will be controlled by a general partner which is also noted in the agreement. The general partner manages the development of the real estate property. This could include purchasing land in order to develop it or selling the land for profit at a future date to another developer. An RELP is almost always a long-term investment as it can take many years for your investment to pay off.
The benefits of an RELP include:
Limited liability – The general partners carry almost all the liability in an RELP. This means they would be responsible for any debts, or losses. An investor is only liable for the amount they invest.
Passive investment – For those looking for an investment that entails no active responsibilities an RELP usually fits the bill. The general partner is the active investor and responsible for day-to-day management and operations.
The risks of an RELP include:
Lack of liquidity – Most RELPs are private and are not listed or traded on an exchange. This can make it difficult or event impossible to sell them. As they are long-term investments you may need to wait years to see any profit.
Lack of diversification – Many RELPs invest in a single property, or one large development. Basically, all your eggs are in one basket. If the project fails or is sold below expected value you could lose all of your investment.
No guarantee – There is no guarantee you will see any profit in an RELP investment. The real estate market can be highly volatile and if a development project goes over budget, or stalls in the approval process, your investment could be lost.
An RELP, and all the other real estate investments we have looked at during our series, are highly risky investments. If you’re investing in real estate in any form always do your research and know exactly what you’re getting yourself into. Never invest more than you can afford to lose, especially when the risk is so high.