The word “passive” in “passive investor” has some negative connotations.
Who can Invest in Multifamily Syndication?
You often hear multifamily syndication and apartment syndication used interchangeably. They are pretty much the same thing. They both involve raising money from passive investors and buying apartment buildings.
One of the most common questions I get are focused on how to break into the world of multifamily syndication. My friends run the gamut of professions, from dentists to doctors to nurse practitioners and also business owners - most of them are not in my field of real estate and real estate syndication.
This works out great for my friends and I. When I have a question about the law, I ask my lawyer friend Steve. When I see a spot and worry about melanoma, I ask my dermatologist friend over lunch (gross? Maybe, but she’s used to it). Inevitably my friends ask me advice about promising investment opportunities and recommendations on how to earn the best return on investment. We discuss commercial real estate and passive real estate investing topics, however lately I’ve been telling all my friends about multifamily value add real estate syndication.
Who can Invest in Multifamily Syndications?
Residual income is passive income that comes in every month whether you show up or not. It's when you no longer get paid on your personal efforts alone, but you get paid on the efforts alone, but you get paid on the efforts of hundreds or even thousand of others and on the efforts of your money! It's one of the keys to financial freedom and time freedom. - Photo by Canva
Short answer: everyone.
Long answer: the multifamily syndications one can invest in varies depending on whether the investor is an accredited investor or not. Accredited investors have more options than non accredited investors.
Why do Accredited Investors have more Options?
When you buy a multifamily syndication with a syndicator, you aren’t buying real estate. What you’re buying is a “security.”
What gives, right?
The reason is this: the syndicator creates an LLC; it’s this LLC that owns the property. All of the investors in the syndicate own a portion of the LLC. Usually, a security must be registered (we need not go into the details of registration, as it’s complicated. It’s also expensive, which is why most syndicators do their best to avoid going through the registration process.
How do they Skip Registering their Securities?
Well the SEC (Securities and Exchange Commission lets syndicators off the hook on registering their security as long as they offer them to accredited investors only. For those of you who may not know, accredited investors have more options and can handle the economic risks often associated with unregistered securities.
Accredited investor: someone who earns more than $200,000 per year or more than $300,000 joint income over the last two years or have a net worth over $1 million dollars. Please note that the net worth does not include the equity in their primary home.
Are you an accredited investor and didn’t know it? Good for you.
Anyone who does not fill into this category is not an accredited investor.
The SEC has rules in place to protect investors, particularly investors who are not accredited. These rules protect investors who may not be high-earners and are investing for retirement or their children’s’ future. As such, they have a lower risk tolerance than an accredited investor so there are more protections in place to minimize the chance that they lose their savings and are out in the street due to a bad investment.
Even if you are not an accredited investor, you can still invest in multifamily syndications as long as you fall under the category of what the SEC considers is a “sophisticated investor.”
Don’t worry, to be a sophisticated investor you need not drink tea with your pinky extended.
“Sophisticated investor” is a term used in the Corporations Act to describe a class of investors that can be offered securities without the kinds of product disclosure requirements that ma and pa investors subscribe to. Sophisticated investors have previous investments outside of the stock market and/or have an educational background in alternative investments. Additionally, sophisticated investors who want to invest in a multifamily syndication must have a pre-existing relationship with a sponsor before they invest in the real estate syndication deal (this is an important point!). This is in contrast to accredited investors who may be offered deals right off the bat
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There are Exemptions…
Investing in multifamily properties like apartment complexes can offer a path to passive wealth generation. - Photo by Canva
The SEC allows sponsors to offer real estate deals to non accredited investors via a 506(b) and the 506(c) offering.
506 (b) Offerings: Syndication includes accredited investors and up to 35 non-accredited investor. Again, these non-accredited investors must be sophisticated investors. FYI this offering is the standard real estate syndication offering we see. In fact, in 2018 over $36B was raised in syndications with over over 85% of all Regulation D offerings are Rule 506 (b).
On the flip side, we have 506 (c) offerings.
506 (c) Offerings: Syndication is targeted exclusively to accredited investors. These syndicates may advertise to accredited investors. A sponsor who wants to advertise their real estate deal may pitch their real estate syndication deal to high-wage earners (doctors, pharmacists, lawyers, business owners etc).
What is the Minimum to Invest?
The minimum varies depending on the deal and the syndicator. In general, most multifamily syndicates are at a $50,000 minimum.
Recommendations to Get Started:
If you’re just breaking into multifamily syndications, it’s best to start with several different syndicates. The last thing you want to do is invest all your money into one syndicate on the first deal. It’s important that you test the waters with several syndicates. In this way, you can become more familiar with the process, see how the different cash flow distributions pan out, and identify one or two syndicates you feel most comfortable.
One final question looms large:
How do you Find a Sponsor with whom to invest?
Vetting the sponsor is a critical step as you will be entrusting them with your investment. - Photo by Canva
Seriously, how do you break into the syndicator underworld? Do you have to go into the matrix or what?
It’s actually not as difficult as you think!
You can find syndicators by doing a google search, through networking, or real estate groups. The challenge is doing your due diligence and researching the syndicate’s track record. Were they profitable? How many deals have they done?
You want to dig deep and learn as much as you can about prospective syndicates before you invest.
What About You?
Do you have any questions on who can invest in multifamily syndications? Can you see the value of investing in syndications versus the more typical pathway of purchasing a property and generating cash flow from a rental property?
With multifamily syndications, there’s the potential to earn cash flow each month as well as benefit from the equity and appreciation of the property when the syndicate sells it.
If you’re not accredited, perhaps it’s time to get “sophisticated” - I hope this article puts you one step closer to your goals on financial well-being.
Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
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Here’s What Investing $50K Annually as a Passive Real Estate Investor Would Look Like in 5-10 Years.
What’s your favorite number? Ask any passive real estate investor, and they’ll likely say $50,000.