Real estate can be an excellent way to diversify your portfolio with alternative investments, but there are seemingly endless ways to invest in real estate.
In this article, we will explore co-investing as an option and the roles you can expect to take.
Investing with an experienced partner will give you some guidance and structure and allow you to invest passively. There are two roles in real estate investing: the General Partner (GP) and the Limited Partner (LP). We’ll explain these roles in-depth in this article.
What are GP and LP in real estate?
A Limited Partner (LP) is an investor who provides capital to the partnership but does not actively manage the investment or the day-to-day operations of the real estate project. The LP’s involvement is primarily financial, and their liability is limited to the amount of their investment.
On the other hand, a General Partner (GP) plays an active role in managing the real estate investment and operations. The GP is responsible for day-to-day management decisions, property management, and overall investment strategy. Unlike LPs, GPs have more liability and therefore take on more risk in a deal.
This structure allows LPs to invest in real estate without taking on the responsibilities and risks of direct management, while GPs can leverage their expertise in real estate to manage the project effectively.
What are The Roles and Responsibilities of a General Partner?
As mentioned above, the GP plays a more active role in managing the real estate deal(s). Typically the GP can expect to take on the following responsibilities:
- Investment strategy development: This includes identifying potential real estate opportunities, conducting market research, and determining the viability and profitability of projects.
- Capital raising: Although Limited Partners (LPs) typically provide the bulk of the investment capital, the GP often contributes a portion of the capital as well. The GP is also responsible for managing the partnership’s finances, which includes budgeting, accounting, and financial reporting to investors.
- Property acquisition and disposal: The GP handles the acquisition of properties, negotiating purchase terms, securing financing, and managing the closing process. Similarly, they oversee the sale of properties, including marketing, negotiating sales terms, and managing the sales process.
- Property management: The GP is often responsible for the day-to-day management of the property. This can involve leasing, maintenance, tenant relations, and addressing any legal or compliance issues.
- Investor relations and reporting: The GP maintains regular communication with LPs, providing updates on the investment’s performance, financial reports, and information on any significant developments.
- Compliance and legal: The GP must ensure that the partnership operates in compliance with all relevant laws and regulations, including real estate laws, securities laws (if applicable), and tax laws.
- Exit strategy: Finally, the GP is responsible for executing the exit strategy for the investment, which could involve refinancing, selling the property, or another strategy aimed at realizing gains for the partnership.
What are the Roles and Responsibilities of a Limited Partner?
Investing as an LP allows you to share in the return from the property without having to be actively involved. You can expect to contribute capital and may be able to share in the decision-making process though depending on the firm:
- Capital contribution: The primary role of an LP is to provide capital for the real estate investment. LPs contribute a significant portion of the funding needed for purchasing, developing, or renovating properties.
- Passive involvement: LPs typically do not participate in the day-to-day management or decision-making processes of the real estate project. Their role is mostly passive, and they entrust the GP with the operational responsibilities.
- Exit strategy participation: LPs are involved in the exit strategy of the investment, which is often where they realize their return. The exit could be through a sale, refinancing, or other means as outlined in the partnership agreement.
As the LPs have limited liability and involvement, they can typically expect a smaller share in the returns than that of the GP. We’ll explore this breakdown next.
What do LPs and GPs Typically Earn?
Real estate deal returns are often paid in a waterfall structure.
A waterfall dictates the share of the return to each party, and how that share changes based on deal performance. At the outset, the return will be paid out in proportion to the investment by the GP and LP. As the deal hits new IRR targets, the GP earns a larger percentage of the return (often called a promote).
Learn more about waterfall deal structures in our guide.
There is another way to invest passively while taking part in the GP’s share of the return: investing as a Co-GP.
What is a Co-GP?
As discussed above, investing as a Limited Partner allows you to passively invest while the General Partner manages the deal, and the property, along with a host of responsibilities. Because you would be a passive investor, your share of the return is proportionally smaller.
A Co-GP Fund differentiates itself in one very important way: instead of investing in the LP side of the fund, you invest in the GP side except you still will invest as a passive investor. In other words, you invest alongside the GP but are not expected to perform any of the GP’s duties. This fund strategy allows LP investors to sit in a GP position and earn like a GP, but remain 100% passive.
Finally, an investment vehicle that allows investors to receive all the benefits of actively investing in real estate (appreciation, cash flow, and tax depreciation) without the headaches, cost, and managing tenants without having to compromise on returns.
Looking to invest like an LP with GP benefits? Invest in a Co-GP Fund with Colony Hills Capital
Invest like an LP but benefit like a GP in the Catalyst Real Estate Fund III by Colony Hills Capital.
If you’re ready to reap the many benefits of investing in a Co-GP Fund then take the next step to invest in the Catalyst Fund III by Colony Hills Capital. Colony Hills Capital has previously sponsored two multifamily Co-GP Funds, Catalyst Real Estate Fund and Catalyst Real Estate Fund II.
Investors are welcome from September 2023 to February 2025, this is a unique opportunity that you will not want to miss. Learn more about Catalyst Real Estate Fund III and take the next step to join today.