Individuals can invest in real estate as either a general partner or limited partner, and there are certainly pros and cons to each. Most individuals will opt to invest as a limited partner, as this is the best way to earn truly passive income.
Other benefits to investing as an LP include:
Greater deal exposure. Since LP investors are not responsible for managing the day-to-day of a real estate deal, they can invest smaller sums in more deals across asset types and geographies. Someone can invest $50,000 apiece into four deals whereas a sponsor with $200,000 to invest would likely contribute that entire amount as equity into the deal they are overseeing.
Less personal liability. As passive investors, LPs are not required to sign personal guarantees or take on other liabilities associated with any specific deal. This is important to any LP who may need to secure financing for another deal (real estate or not), as lenders will look to see what sort of liabilities are outstanding as part of that individual’s portfolio. To the extent an LP investor can limit their personal liabilities, the better off they will be when trying to finance other investment opportunities.
No direct real estate experience required. Many people are interested in investing in real estate but, absent any prior experience, are unsure how to get started. Investing as an LP is a great way to gain exposure to real estate without having any direct real estate knowledge. By investing with a trusted sponsor, the LPs can learn about real estate while the GP takes the lead on the actual execution. Those who participate as LPs will often go on to participate in smaller deals as GPs, having learned from their experience as LPs over time.