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A real estate limited partnership (RELP) is when a group of two or more people join together to form a partnership for the sole purpose of financial gain from an existing property. The property can be used for rental income, building new structures or for increasing capital on vacant land that may appreciate in value. In a RELP, there has to be at least one general partner and one limited partner, but the number of limited partners can vary.
When forming a real estate limited partnership, a partnership agreement is typically set up, naming the general partner and the limited partners. The return on the investment is also usually documented in this agreement. Depending on the laws of the jurisdiction where the partnership is arranged, there may also be an ethics or morality clause included in the agreement. Unless one of these clauses has been violated, a partner usually can't be released from the partnership without his consent.
The limited partners in a real estate limited partnership typically are only responsible for an investment debt up to the amount they invested, meaning they can't lose more than they initially put in. Limited partners don't have authority over the real estate investments, however. This can be an attraction to a person who would like to see returns on their investment without the financial risk they would otherwise incur being on their own. A limited partner also would not have to worry about the day-to-day operations of owning the investment himself.
There can be a number of advantages to becoming a limited partner in this type of agreement. Some benefits may include tax shelters, potential return on the original investment income and the fact that the limited partner has little involvement in the working part of the partnership. At the same time, a limited partner must realize he will have no control of what the general partner is doing once the partnership has been set out. Basically, the limited partner has to have blind faith and enough trust in the general partner to know he will manage the investments wisely.
Becoming the general partner in a real estate limited partnership also may have its advantages. In some instances, the general partner may not have to provide a financial investment into the partnership. He also typically manages the investment and the return on the investment as he sees fit, to the extent that he follows what is set out in the original partnership agreement. The general partner generally has more responsibility, but he also has more control over the investment.
When considering a limited real estate partnership, it is usually a good idea to meet with an attorney as a group to find out what the legal responsibilities of each partner and the partnership as a whole may be. The attorney can also draw up the partnership papers for each partner to sign.
@Logicfest -- There is a way to get around any conflicts of interest. It is called disclosure. That little word will avoid a lot of sins because it lets all parties to a transaction know exactly what is going on.
It is also a very good idea for Realtors entering into one of these things to look at the ethical guidelines they must follow. For example, a Realtor representing a landowner could get in a lot of trouble for also claiming he represents the buyer (the RELP) in a deal and using that position to negotiate a low sale price on the land.
There is a clear conflict of interest there.
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