Many people are sometimes confused about the difference between REITs and RELPs. RELPs, or Real Estate Limited Partnerships are a kind of syndication that possess many of a REIT’s benefits.
These benefits include (potentially) financial rewards, investment security (potentially, once again) and, ideally, tax savings. The General Partner is the party responsible for the strategy, execution and day-to-day operations of the RELP, and whose responsibilities are comparable to those of a trustee of a REIT. The General Partner enjoys all decision-making responsibilities for the investment, and also assumes liability for it.
The other partners in the group are Limited Partners. These are the investors, and their status as limited partners means their financial obligation is limited to whatever amount they chose to invest at first – they don’t have to worry about anything else. Just like with REITs, the Real Estate Limited Partnership investor is spared management responsibilities, and is relieved of liability for principal debt. And, just like a REIT, in many cases RELPs allow cash investments of any size.
Unlike Real Estate Investment Trusts, however, which offer long-term investment in a diversified portfolio of properties, and are also extremely easy to cash in, a RELP) is often used for projects that last for shorter terms. Also unlike REITs, RELPs often do not distribute cash until the end of the investment, and properties usually do not immediately generate revenue (which is one way REITs generate regular distributions. And if Limited Partnership vehicles did create revenue, the cashflow would probably be put to best use funding the projects’ construction or redevelopment.
Once the development or renovation is complete, however, the value of the property will often be significantly higher than that of the initial investment. RELPs generally provide higher yields over the short term, and unlike REITs, RELP investments are generally not redeemable before a predetermined “liquidity event”. In most cases any profit would be disbursed to the Limited Partners.
In summary, the main difference between Limited Partnerships and Investment Trusts is that the former are short-term investment vehicles with no payouts during the term of the scheme. However, both are considered to be a high-growth form of investment, and experience little if any of the ups and towns commonly found in the stock market.
This was just a short comparison between REITs and RELPs. Group-owned real estate investing is a big subject, and I look forward to exploring it with you in a future article.