17) The difference between General and Limited Partners
For many entering the world of real estate investing, it is critical to understand what the terms General Partner (GP) and Limited Partner (LP) are to make sound investment decisions. What do these terms mean and what role do they play in the grand scheme of an investment opportunity? These two types of partners are fundamental in this field. They have significant differences in how they operate; both are needed to complete the puzzle and ensure success.
Limited Partners, or LPs, are passive investors who pool their finances with others to invest in various projects. LPs generally do not want to have day-to-day involvement but will provide equity for an investment return at a later date. Although they are not responsible for daily operations, LPs maintain ownership of the property. Another critical aspect of an LP is that they are only liable for the amount they commit. LPs can get their feet wet in real estate and diversify their investment portfolio.
General Partners, or GPs, typically do not contribute as much equity as LPs but handle the day-to-day portion and assume the majority responsibility for an investment. This includes possibly having personal guarantees to the lender. They will also receive a promotion fee once they can return the investment principal and are able to meet certain return criteria.
Overall Limited Partners are geared toward those who plan on passive investing, while General Partners are usually corporations, property managers, or developers who operate as a business. There is a role for every individual potentially wanting to enter this industry dependent on their risk tolerance and involvement preference.
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