Good investors are constantly trying to find the most lucrative investment opportunities available. And if they’re passive opportunities, even better. If they also give back to the local community by creating jobs and adding to the economy, it’s a home run.
Having active investments you manage on a day-to-day basis is fine, like researching and picking your own stocks. But once you’ve amassed some capital, it’s time to get that money to work for you by investing in passive opportunities.
A very common investment is real estate, but the opportunities are greater than just buying an investment property, finding tenants and collecting rental income. This isn’t a bad strategy—and can provide profit in two different ways (capital appreciation and net profit on rent)—but it’s not as passive or hands off as some other options.
Look at real estate investment trusts (REITs), for example. Business Insider defines REITs as “companies that own, operate, or finance income-producing real estate ventures. Publicly traded REITs offer investors a liquid way to invest in real estate without having to buy or manage property themselves.”
REITs can be great investments that diversify a portfolio and offer high dividend payouts for investors, but there are some significant risks as well. One of the biggest is the unpredictable and volatile nature of this investment type. Economic uncertainty only makes the investments swing even more.
Investors might get hit with higher taxes as well. As Forbes explains, “Most of the income that REITs distribute to investors counts as ordinary income rather than qualified dividends. That means it’s taxed at your marginal income tax rate instead of the preferential, lower rate given to long-term capital gains and most other dividends.”
The Benefits Of Real Estate Limited Partnerships (RELPs)
Another model of real estate investment that’s not nearly as well known as REITs are real estate limited partnerships (RELPs). Investopedia defines it well: “A real estate limited partnership (RELP) is a group of investors who pool their money to invest in property purchasing, development, or leasing. Under its limited partnership (LP) status, a RELP has a general partner who assumes full liability and one or more limited partners who are liable only up to the amount they contribute.”
There are different types of RELPs, with different requirements. Some require accredited investors, and some exist for different lengths of time, ranging from months to years. In my experience working with investors with RELPs, many have a somewhat narrow focus, such as a building or development in a certain area. Depending on the project, these partnerships can accept investments of varying sizes, some starting as low as $5,000. The LP will combine investments from the different participants and fund the property or project.
In my mind, this is a benefit. It means you’re investing in a specific building or project as opposed to a whole portfolio. The profit potential can be greater. And if you choose the right general partner or firm, they’ll handle all the planning and marketing, leaving you to collect your passive income.
What’s more, if the project is in your community, there’s a sense of pride in the investment. Rarely in investing is there the opportunity to invest in a project that has the potential to better your community and infuse the local economy with new jobs.
There are a few things to keep in mind when investing in a RELP. One of the biggest is understanding that the general partner has total control over the partnership’s operations and decisions. Those who invest—the limited partners—need to really trust the entity in charge because they’ll be making all the decisions.
How can investors get involved in a RELP? If you feel comfortable investing in your local area, it’s best to start there. If you believe in your community and its future, find a trusted development firm specializing in accredited, private real estate limited partnerships and dive in. Good firms build an overall plan that minimizes risks and creates high returns for investors. They begin research planning way before a project is ever introduced to the public as investment.
Investing in local development via RELPs has the potential for high returns in addition to tax benefits and a sense of pride in your community. In my experience, there is no better feeling than driving by your development investment in a community you love and thinking, “I had a hand in building that.”
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.