What is a limited interest?
A limited interest is defined as an ownership stake in a Limited Partnership or in a Limited Liability Company. The Limited Partner or Member is typically a non-controlling person or entity that has invested in a particular entity for a pro rata return on the investment.
Limited interests are mostly commonly invested in or acquired through a few different types of structures.
Through a Limited Partnership, a limited partner can invest in the Limited Partnership entity. The limited partner is someone who receives profits from the entity based on the amount invested in the entity. And whereas the General Partner has liability for the entity’s debts, a limited partner’s liability to the entity’s debts is limited to their investment in the entity.
Limited Liability Company
Through a Limited Liability Company, a member can invest in the Limited Liability Company entity. The member is someone who owns a percenter of member unit in the limited liability company. The investor receives profits from the entity based on a pro rata basis determined by the percentage ownership in the entity. Both Managers and Members have limited liability in a Limited Liability Company with the amount of liability being limited to their investment in the entity.
A Trust Deed is a form of mortgage where title is transferred to a Trustee as protection for the lender until the Borrower pays off the loan. Trust Deeds can be fractionalized so investors can be partial investors in a loan. A Trust Deed investor is not an owner of an asset, so the investor’s liability is limited to the investment in the Trust Deed.
How to invest in or acquire limited interests?
There are a multitude of ways to invest in or acquire limited interests. Both ways take analysis, comfort with the Sponsors, understanding of the business plan, and a strategy to obtain diversification while minimizing risk.
Investing in limited interests
The old-fashioned way of investing in limited interests directly with a Sponsor is still alive and well. You can invest directly with Sponsors who you know and trust. You would typically know these Sponsors because they are a friend, family, a professional colleague, or through investment clubs or investment memberships that you may be a part of. This is still a great way to invest, as you have a relationship with the Sponsor. This kind of investment can be for a single asset, multi-asset, or in a Fund.
I am also an investor that invests in other Sponsor’s deals as a limited partner or member. I will continue to invest with Sponsors that I know and trust. I will also continue to invest with Sponsors that I have invested with in the past who I have built a relationship with.
A newer style of investing in limited interests is through crowdfunding. Real estate crowdfunding is a method of raising small amounts of money from a number of investors for a real estate venture. Crowdfunding still requires analysis. Deals that are sourced on crowdfunding platforms can be good, but it does not mean that you can be complacent. It is imperative that you critically look at the deals, the current returns, the expected future returns, the fees, and even the amount of equity the Sponsor plans to co-invest. As a Sponsor, we always co-invest in our deals. Crowdfunded investments can be in single assets, multi-assets, or in Funds.
I have been an investor in a number of crowdfunded deals on a number of different platforms. I will continue to invest through crowdfunding platforms after doing both deal analysis and Sponsor analysis. I will also continue to invest with Sponsors that I have invested with in the past on crowdfunding platforms who I have built a relationship with.
A way to get exposure to debt investments are through Trust Deeds. These vehicles can give you a more secure return. The loans or Trust Deeds are secured by real estate. The yield is a fixed return for a set amount of time. These Trust Deed investments are usually one-off investments that can limit downside risk and provide a reliable return. The downside is that there is no upside participation, and in the event that a Borrower defaults on the payment terms, costs to remedy can be more expensive than originally anticipated.
I have been an investor in Trust Deeds and I will continue to invest in Trust Deeds.
Acquiring limited interests
Limited interests can be secured through a variety of sources. There are companies that sell limited interests on the secondary market. There are also Sponsors who may have limited capital, but whose limited partners may have a need to sell. Often times, these limited interests can be purchased at a discount. Given the current state of the economy, this could be a time where more limited interests become available. As always, it is imperative to do due diligence on both the deal and the Sponsor. In the past, we have seen that limited interests become available when the current limited partner or member has a life event and is in immediate need of cash.
I have been a buyer of limited interests in the past and I will continue to be a buyer of these interests when they become available. These investments are more opportunistic and while we will proactively pursue these types of investments, we also anticipate that deals will be presented as these types of investments arise through our relationships.
What is the benefit of investing in or acquiring limited interests?
There are a variety of benefits to investing in or acquiring limited interests. Detailed below are what we believe to be the top four benefits.
Passive Cash Flow
The primary benefit of investing in or acquiring limited interests is the ability to obtain passive cash flow. When investing in or acquiring limited interests, you often times will have very good passive cash flow. These investments are typically Sponsored by high quality real estate investors that are investing in asset classes and deals that you would not likely have access to. The deals are also typically larger deals that are mid-tier or institutional quality. This can be a positive when it comes time to selling, as the next buyer will also likely be a high-quality buyer and operator.
Another excellent benefit of investing in or acquiring limited interests is that you can make the investment in a number of ways. You can buy personally or through a family Trust. You can buy using an entity such as a limited liability company or limited partnership. You can invest using your self-directed retirement vehicles. This gives you flexibility when you invest in or acquire limited interests.
A third benefit of investing in or acquiring limited interests is that you have the ability to diversify. As an investor, you can diversify smaller amounts of capital over a larger number of deals, which we call the Equity Leverage Method. For example, if you have $250,000 to invest, you could buy multiple $25,000 limited interests. You could certainly place $250,000 in one deal, but you do not get the same level of diversification if that is the entirety of your investment capital. You also have the added benefit of what we call the Diversification Method. In the Diversification Method, you benefit by having access to multiple deals that are in different asset types with different Sponsors in multiple geographies.
Pass through taxation
The final benefit that we will discuss is pass through taxation. When you invest in or acquire limited interests, the entity calculates the net income of the business. Often times, these investments can have sheltered income through depreciation for some amount of time. In those case, you can have good cash flow from an investment on an actual return basis while you may have a tax loss based on generally accepted accounting principles.
What kinds of returns to expect?
There are a wide range of returns depending on the particular investment, however, we look at the following ranges for debt and equity limited interests.
|Target Annual Yield Range||6% to 10%||6% and up|
|Target Internal Rate of Return||6% to 12%||12%+|
|Target Equity Multiple||1.20x||1.75x+|
Guardrail Finance provides opportunities for education, insights, ideas, investment strategies, and investment opportunities through our content, services, investment vehicles, and exclusive membership programs.
Until next time, happy investing!