DON'T SHARE THIS VIDEO - DON'T post it on Facebook.
- DON'T attach it to an email.
- DON'T tell your neighbor.
Here's why... | Investing in Business as a Limited Partner |  | By Mark Ford |
| | Editor's Note: Got 10 minutes? You could make up to $7,900 in monthly profits... with just one trade per month. Yet not 1 in 99 - no, not 1 in 999 - traders knows that this opportunity exists. Get all the details on Andy's discovery here. | | | | | Rooster's Crow
One of the important lessons Mark learned from his limited partnership investments is that the best investment deals come from what you know. And to truly know a business takes longer than an elevator pitch from a founder or lunch with a potential partner. It takes decades in the field. You should understand the ins and outs of the industry: how it makes money, what kind of marketing it needs, what its best practices are... And if you know these things better than the partner or founder you're considering investing with, you need to consider your options. Can you use your knowledge to help them make good business decisions? Or should you hightail it out of there? | | | | | | | | Rooster's Crow | | | One of the important lessons Mark learned from his limited partnership investments is that the best investment deals come from what you know. And to truly know a business takes longer than an elevator pitch from a founder or lunch with a potential partner. It takes decades in the field. You should understand the ins and outs of the industry: how it makes money, what kind of marketing it needs, what its best practices are... And if you know these things better than the partner or founder you're considering investing with, you need to consider your options. Can you use your knowledge to help them make good business decisions? Or should you hightail it out of there? | | | |
Today, I want to introduce you to an income opportunity I got into years ago... that has proven to be one of my most lucrative.
The year was 1985. I was in an elevator in Boca Raton, Florida, on my way to a business meeting.
I was dressed in a new suit, feeling very grown up. At the second floor, the elevator stopped and another young man in a new suit stepped in. It was Jerry, a buddy of mine from high school.
"Hey, Jerry," I said. "What are you doing
here?"
Turns out he had moved to South Florida several years before I did.
"We've got a lot of catching up to do," he said. "Are you free for lunch?"
"Sure," I said. "I'll meet you downstairs at one o'clock."
Over lunch, Jerry told me that he was a real estate attorney. And he was now embarking on a new career as a property developer.
"This town is growing fast," he told me. "There is big money to be made building houses for snowbirds."
Jerry's enthusiasm about what he was doing got me interested. So the next day, I asked my business partner what he thought about it. He agreed with Jerry. In fact, he was already invested in several developments in West Boca.
I called Jerry and asked whether there was "any way" for me to get involved in his project. And, yes, there was. His project - an upscale community of 200 homes - was structured as a limited partnership.
He explained that, as a general partner, he had to do all the work and take all the responsibility. But I could come in as a limited partner and make money by doing nothing.
That sounded good to me. For the first time in my life, I was making much more money than I needed, but I had no time. And I didn't need any more responsibility.
Jerry had a business plan. And permits. And projections. According to those projections, I could make between 25% and 35% on my money.
I knew little about property development and even less about financial projections. But I was impressed by how detailed the plan was. I knew Jerry well enough to know that he wasn't falsifying the numbers. And the numbers looked good.
"Even if I don't get a 25% return," I remember thinking, "I'll still be happy. I'll be happy with 20%."
So I wrote Jerry a check for $50,000. | | | | | | One of my main missions is to share with you what I've learned about creating extra income and building wealth. I've told you how you can build your wealth by running a side business online. I've told you how I gradually and timidly became an entrepreneur.
But so far, I haven't said a word about that first investment with Jerry - and dozens of similar investments I've made since then. By "similar investments," I mean direct investments in small business ventures. And for our purposes now, I'm going to limit our discussion to investing in those ventures as a minor shareholder or "limited partner."
As a limited partner, you're not buying into a business with the intent of running its daily operations. You're not going to wield significant control or be the go-to decision maker. You're just a "money guy." You supply the business with cash in exchange for a small share of the profits.
All businesses of this type are structured in one of three ways: limited partnerships (LPs), limited liability partnerships (LLPs) or limited liability companies (LLCs).
This kind of investing can give you steady and substantial income plus equity growth. That amounts to a potentially big return on investment (ROI) with limited risk and virtually no work.
It is that last benefit - not having to do any work - that most appealed to me with that first investment with Jerry.
Since then, I've invested in more than a dozen real estate development projects. Also three natural resource companies, two startup technology companies, a private lending company, a furniture factory, a movie, a dozen publishing ventures, a dozen marketing companies and a local brewery.
Pros and Cons of Being a Limited Partner
The main benefit of being a limited partner, as I said, is the potentially high ROI. Higher than you can get with stocks and bonds... without having to do any work.
For example, when I invested $80,000 in a wood mill in Nicaragua years ago, I did so because I knew there was a fast-growing demand for its products. I also knew that an experienced person was running the business. The other limited partners and I didn't have to build the plant, hire and train the employees, produce the products, or sell anything. Our only job was to write that first check and then cash profit-distribution checks when they arrived.
Another thing I like about being a limited partner is that, in most cases, your financial liability is limited to your initial investment. If the business fails completely, the general partner might have to dig into his pocket to bail it out. But not the limited partners. If, for example, the wood mill in Nicaragua had failed, my risk would have been limited to that $80,000.
A third benefit of investing in an LP/LLP/LLC is that you can take advantage of certain tax benefits. As a limited partner, you don't have to pay self-employment taxes, as you would with your own business. And the profits are treated as pass-through income. So they are not subject to "double taxation," as corporate profits are.
When you invest in an LP/LLP/LLC, the first cash you receive is usually return of capital, which is not taxable. Plus, any profits that follow are treated by the IRS as long-term capital gains. Long-term capital gains have a lower tax rate than ordinary income (unless you're in the lowest tax bracket).
And there is another - intangible - benefit. I'm talking about the fun of being involved in a business outside of your normal sphere of expertise. That wood mill, for example. I really like owning it. Every time I'm in Nicaragua, I stop by to watch the hundreds of men and women working the machinery and admire the quality products they produce.
So those are the benefits. But there are drawbacks as well. You do have a certain sum of money at risk. If you invest in the wrong business, you can lose all of it. And if you're a worrier, you will worry about your investment without being able to do anything about it. As a limited partner, you have no obligation - but also no right - to get involved in management.
My Batting Average
That first project I invested in with Jerry was successful. But it was not nearly as successful as he thought it would be. Since he was new to the business, he didn't anticipate a significant increase in the cost of building materials and labor. Those increases - plus some construction delays - reduced my profit even below the "worst case" 20% that I expected. Still, I made 15%. A very good return.
I continued to invest in just about every project Jerry brought to me. I doubled my money on one project in Aspen and made 15% to 25% on several more. But I lost my entire investment in a development in Miami. (They found Native American bones while digging the foundation!) And I lost a big chunk on a project that ran into Chinese drywall problems.
Overall, I've done well with Jerry. I'd say my average ROI has been about 12%.
My experience with other investments as a limited partner has been mixed.
I made 10 times my money on an overseas development project. The project was (and is) a great success. But the general partner has yet to get all his money out.
I made good money with two of my investments in natural resource companies. But I lost half my money in the third one. And I lost all of the money I invested in the movie and the first high-tech startup. (The second one could still be profitable.)
Along the way, I learned three important lessons... and now follow three simple rules... | | | Have questions for Mark on limited partnerships? Let us know here. | | | |
|
No comments:
Post a Comment
Keep a civil tongue.