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by | 06, Aug 2022

Bonus Episode: LP vs GP, Who takes the most risk?

Who takes on the most risk in a deal? Who provides most of the capital?

In today’s bonus episode, Dan is going to break down the difference between Limited Partners and General Partners, the two classes of investors within syndications.

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So… WHO does WHAT in a syndication? What’s the difference between the LP and the GP??

Find out on this week’s bonus episode of Multifamily Investing Made Simple!

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Tweetable Quotes:

“Unless you have any kind of partners, you would be doing all the work, doing all the things. Now in a syndication, we divide these things.” – Dan Krueger

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** Transcripts

Difference Between LP and GP

[00:00:00] Dan: Today we’re gonna be breaking down the difference between the general partners and the limited partners on a syndication.

Hey, what’s was one. I guys Dan Kruger from Invictus capital. And today I wanna explain. What the difference is between a general partner and a limited partner on a syndication. So in a syndication, we’ve got two classes of investors in the deal. There’s the general partners, which are the active investors.

Uh, these would also be called the operators in a deal. And then there are the limited partners, and these would be the passive investors. And these are the people that are contributing their capital, but that’s about it. And we’re gonna dive into the details on that. so typically, if you were gonna be investing in real estate, you would go out, you would find a property, uh, you’d do the hunting for it.

You’d contact brokers. You’d do all that stuff to drum up opportunities. Then you would go to the bank and you would take out a loan in your [00:01:00] name and you would put up all the capital yourself. And unless you have any kind of partners, you would be doing all the work, doing all the things. Now in a syndication, we divide these things.

The two categories, the limited partners and the general partners, and the limited partners are really just bringing their time, the risk profile significantly less. And they’re not really doing any of the work. General partners are pretty much doing everything. And this is I think the sweet part for the sweet part for limited partners.

Now the general partners take on the majority of the risk. This is done in large part by taking out the. on a syndication, the passive investors, the limited partners are not taking on the risk of any of the debt. Now there is still debt on the property, but it’s the general partners, the operators, the, the active investors who are taking on the risk of that debt as opposed to limited partners.

So as a limited partner, if you put $50,000 into a syndication, that’s the most that you could lose. The general partners are on the hook for a lot more. They’re on the hook for the mails of the money they put in, as well as the bounce of the loan that they’re taking out. So the risk [00:02:00] profile starts to look a lot better for a limited partner in a syndication for that reason.

Now the, the general partners are also the ones doing all the work. They’re the ones going out and finding the deal, procuring it and presenting it to the passive investors so that the limited partners, the passive investors don’t have to do any of that stuff. And the general partners are also going to be executing on that business plan after we close on the property.

So all of the work that’s required to get the deal to the closing table, present it to investors and manage the deal after. That’s all done by the general partners. Now the limited partners don’t need to really have any, you know, expertise here either, right? That’s part of why they’re, they’re going in with a general partner.

Uh, they should do some due diligence on the operator and have a good idea of how these things work. They don’t need to know all of things. So there’s a significantly smaller time investment required by the passive investors. So to sum it up, really the big thing is the passive investors. They’ve got a little bit of work to do on the front end with vetting operators and, and things like that, but they don’t really have to do any of [00:03:00] the managing of the property.

They don’t have to take out the debt. They’re really just contributing their capital and taking on significantly less risk. And the general partners are doing pretty much everything else. So I hope that sums up the difference between general partners and limited partners for you guys. Uh, if you wanna see a deeper dive on this, check out, passive investing made simple, uh, the book, which is basically the 1 0 1 guide on how to pass away investment real estate.

We break it down a lot deeper in, and we’ll see you guys in the next.

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