Time to Look at Limited Partnerships

In this article, we talk about real estate limited partnerships and how they are a proven method for investors wishing to reduce their taxable income.

Pooling funds is a strategy capitalizing on B.C.’s hot housing markets with manageable risk and some eye-popping potential returns

The average price for a detached house in Metro Vancouver is now $1.54 million and the average condo apartment is selling for $524,600, according to real estate board of greater Vancouver. You need a large down payment – starting at $100,000 – to make even condo rental payments work at covering your costs.

But there is a quieter, proven route to riches in residential real estate that involves investors pooling nominal funds and then sharing in the cash flow and appreciation on a managed property that they may never even have to step into.

These are often structured as limited partnerships (LPs) and, in the past few years, have generated substantial returns of up to 50 per cent or more.

The concept of a residential LP is that investors put money into a development where a management team has already done the leg work in acquiring the zoning, development permits, construction contracts and exit strategies.

A real estate offering is the pooling of funds to finance a large-scale real estate investment, enabling investors to achieve collectively what they cannot readily achieve on their own. Advantages of real estate LP’s are that they are real properties and therefore a tangible or “hard asset”.

Depending on how it is structured, investors can receive a share of rental income and a share of the profits at exit (usually in less than three years). In many cases, investors also have the option to purchase one of the housing units at a discount.

What is the role of the real estate developer?

the developer envisions, creates, controls and orchestrates the process of development from start to finish. The developer takes on the greatest responsibility in the creation or development of real estate—and normally receives the greatest rewards. Typically, a developer purchases and controls a parcel of land, designs the development concept and plans, determines the marketing strategy for the property, obtains the necessary public approvals, arranges financing, constructs the structure, then leases, manages and ultimately sells the development. Developers work with many different partners along each stage of the process, including architects, city planners, engineers, surveyors, inspectors, financial institutions, lenders, contractors, sales & leasing agents and others.

How important is the role of the real estate developer?

Real estate developers play an extremely important role in controlling costs and in improving the efficiency and effectiveness of development projects. The best real estate developers are visionaries, looking years – even decades – beyond today’s world to take advantage of regional and city planning strategies to secure future projects. At their finest, real estate developers are entrepreneurs who seek out opportunity and drive it to reality, and in the process improve our communities and cities.

What is the development process?

Effective management of the development process requires experience, strong relationships with all the parties involved and a hands-on management approach by a qualified developer, such as The Excellentia Group. The Excellentia Group effectively manages and controls all stages of the development process – site selection, purchase negotiations, planning, zoning & approvals, design, market feasibility, construction/project management, site servicing, project marketing and sales.

What are the benefits of Limited partnerships:

Real Estate Limited Partnership units are a proven method for investors wishing to reduce their taxable income. investors enjoy the flow-through benefits of tax deductible partnership losses during the lifetime of the partnership. When the underlying asset property is sold, the proceeds to investors are taxed favorably as capital gains.

RELP offers limited liability, meaning, as a limited partner you are not responsible for any more money than your initial investment. This is unlike conventional real estate where once you buy a property, you can lose more than your initial equity capital. Your equity capital can be borrowed, hence interest deductibility on the borrowed amount. Borrowing your down payment is forbidden when buying real estate directly.

What are the risks associated with Land Development?

Due to the complexity and uncertainty, as with any type of business venture, Land Development has a degree of risk that needs to be controlled and mitigated. Conversely, Land Development also carries with it a very lucrative opportunity for profits. The more effectively one is able to control and manage the uncertainties, the more predictable are the end returns and profits. Within the realm of new construction, some of the primary uncertainties revolve around demand and marketability, obtaining and managing construction finances, controlling construction costs and dealing with delays. In the context of a Limited Partnership, these risks are all controlled and borne by the General Partner.

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