Who can invest in a multifamily syndication? Read on to find out if you’re an accredited or sophisticated investor and learn about standard investment minimums.
When you talk to operators about investing in apartment buildings, they are likely to ask whether you’re an accredited investor.
What does that mean? And if you don’t qualify, can you still invest in multifamily deals?
In this week’s video blog, we explore WHO can invest in multifamily syndications and HOW MUCH you can expect to put in a deal!
We look at the difference between accredited and sophisticated investors, discussing who can invest in 506(b) vs. 506(c) offerings.
You’ll understand what’s a typical minimum investment and learn how to make decisions around how much you put in a deal!
Watch the video below (or keep reading).
Based on SEC regulations, an accredited investor is someone whose annual income has exceeded $200K (or $300K with a spouse) for each of the last two years OR who has a net worth of $1M-plus, either alone or with a spouse and NOT including the equity in their primary residence.
Because accredited investors are high-net-worth individuals (HNWI), the SEC allows them to invest in deals without knowing the sponsor in advance. The thinking is, if they lose the money they put in real estate deal, they won’t lose their livelihood.
If you don’t meet the SEC requirements for an accredited investor, you can still invest in multifamily syndications, so long as you are a sophisticated investor. This means you have previous experience investing outside the stock market and/or education in alternative investments.
It is important that non-accredited investors have a previous relationship with the sponsor before investing in a real estate deal. For example, if you register with us at Nighthawk Equity, we will get to know you via an investor questionnaire and a live call as well as potential trainings or property tours BEFORE we present you with a live deal. (Accredited investors can be offered deals right away.)
Regulation D of the Securities Act allows sponsors to offer real estate deals without having to register with the SEC, as long as we follow certain guidelines. The two exemptions are the 506(b) and the 506(c), with the 506(b) being most common for multifamily syndications.
- The 506(b) allows us to take money from accredited investors AND up to 35 non-accredited investors who are known to us and qualify as sophisticated investors. Under 506(b), we cannot advertise the offering.
- The 506(c) allows us to take money from accredited investors only. Under 506(c) guidelines, we CAN market the deal to HNWI. For example, a sponsor might buy a list of doctors and invite them to a luncheon in order to pitch a syndication deal.
So, how much do limited partners (LPs) typically invest in a deal? The minimum investment varies by operator and the deal itself, but generally lies somewhere between $50K and $100K. For larger deals, the minimum may be closer to $100K due to the limitations of the 506(b) exemption.
How do you decide how much YOU should invest? I would caution against investing all of your money in a single deal unless you’ve invested with the operator before and feel very comfortable with them.
A good rule of thumb is to do the minimum investment and see how things go. What are the cashflow distributions? How well does the operator execute on their business plan? Do they communicate with you regularly?
Spread your investments out over several deals in the beginning. Then, once you’ve found one or two operators you can trust, go deep.
Whether you’re an accredited or sophisticated investor, you can take advantage of the opportunity to invest in multifamily syndications:
- Accredited investors are eligible for 506(b) AND 506(c) offerings, and they don’t necessarily need to have a previous relationship with the operator.
- Non-accredited/sophisticated investors are eligible for 506(b) offerings, and they must establish a relationship with the sponsor prior to investing in a deal.
How much you invest is up to you, but minimums are usually in the $50K to $100K range, and it’s best to spread your money out over several deals until you find a strong operator or two to work with long-term.
Want to qualify as a sophisticated investor? Begin your education in alternative investments by downloading our Special Report: What’s the Best Investment? Stocks or Real Estate to learn more!