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Multifamily Syndication, Accredited Investors & the SEC: Everything You Need to Know

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Multifamily syndication deals are perfect for investors who want to earn from real estate investing but do not want to go through the hassle of becoming a landlord. With a multifamily syndication deal, real estate investors no longer have to worry about hiring a property management team, dealing with tenants, and handling emergencies. On top of that, they get to enjoy all the benefits of owning a multifamily real estate investment.

As good as this sounds, not everyone can participate in a multifamily syndication. Because of regulations from the US Securities and Exchange Commission (SEC), only accredited investors can participate in this investment opportunity. Here we will discuss what accredited investors are, why the SEC has these regulations in place, and how the definition of an ‘accredited investor’ has changed in recent years.

What is a Multifamily Syndication Deal?

Before we dive into the definition of accredited investors, let us have a brief look at multifamily syndication and what it means. A multifamily syndication is a real estate deal wherein multiple investors pool their resources together to purchase a single real estate property. While this type of deal can be done with any real estate property, multifamily real estate is the most popular property type for real estate syndication. This is due to the steady, reliable cash flow that multifamily properties can provide. [1]

A multifamily property is a real estate investment that has more than one unit. This includes duplexes, triplexes, apartment complexes, and condominiums.

Generally speaking, a multifamily rental property is also more expensive than single family homes because they are larger and have more units. This means they are difficult to obtain for a lone investor. But the advantage of this type of real estate investment is that they are less likely to become completely vacant. Even if one or two units become vacant, multifamily properties can still generate some cash flow. These are income-producing properties that have consistent and reliable cash flow through monthly rent. Some investors may even use one of the units as their primary residence.

A syndication deal solves most of the problems associated with running a multifamily real estate investment. In a syndication deal, a sponsor locates the deal, coordinates the funding, puts the deal together, and then finds potential investors to participate in the deal. The investors can pool their funds together to purchase a large multifamily property that they normally would not be able to afford on their own. [1]

Investors provide most of the financial resources necessary to purchase the multifamily real estate, in exchange for equity and a portion of the monthly cash flow.

The sponsor, also known as the syndicator, will take charge of property management. They may hire a property management team or handle it themselves. In any case, this is a true passive investment in real estate because investors don’t have to worry about the property.

Thanks to multifamily syndication deals, real estate investors don’t have to secure a large capital just to reap the benefits of multifamily investing.

Limited liability companies (LLC) or limited partnerships (LP) may be formed for the sole purpose of the multifamily syndication. Limited partners are the passive investors while the sponsor serves as the general partner or manager. [1]

Benefits of Multifamily Syndication

For real estate investors looking for prospective investments, real estate syndications are some of the best when it comes to producing reliable, passive income. Plus, you don’t have to play the role of landlord, which is one of the most challenging aspects of having real estate investments.

This investment strategy allows real estate investors to purchase an apartment complex that they normally would not be able to afford. It is a great source of passive income because tenants will be paying rent on a monthly basis. So from rental income alone, multifamily investing can already be very profitable.

With multifamily syndication, investors can also enjoy all the tax benefits of owning multifamily real estate.

Additionally, multifamily syndication investors still profit from the increase in equity value even if the building is not fully occupied. While equity growth is not guaranteed, it is a possibility. [1]

After the real estate syndication deal is done, investors no longer have any other responsibilities. They don’t have to manage the property, which means they can focus on other real estate investments, business opportunities, their family, or their career. You can take care of your other investments while the apartment building generates passive income. [1]

Why Does the SEC Only Allow Accredited Investors to Participate in Multifamily Syndication Deals?

Despite the benefits of multifamily syndication, not everyone can participate in them. You may have already heard of the terms ‘accredited investor’, ‘non-accredited investor’, and ‘sophisticated investor’.

The SEC established these criteria to categorize private investors. Depending on which one you are placed in, certain investments may or may not be accessible to you. This includes multifamily syndications. [2]

Before the SEC amended their definition of accredited investors, multifamily syndications used to be accessible only to a small group of people. The idea was that multifamily syndications should be accessible only to those with a certain net worth because these are the individuals with a financial ‘safety net’ in case an investment does not work out.

Before, in order to become an accredited investor, one must meet at least one of the monetary requirements set by the SEC. Only then will they deem an investor financially stable enough to invest in real estate syndication deals and other private investment deals. [3]

Back then, an accredited investor is someone who has an individual income of over $200,000 per year, or a joint income of over $300,000 per year. An accredited investor may also be someone with more than $1 million in assets outside of their primary residence.

Investors do not have to meet both requirements—only one is required.

But the amended definition of an accredited investor expands it to include more people, and we will discuss this expanded definition later on.

After the SEC expanded their definition, there are now certain real estate syndication deals that are accessible to both accredited and non-accredited investors. However, some of them are still restricted to accredited investors. [2]

There is no official accreditation process in order to become an accredited investor. The responsibility of determining whether or not people qualify as accredited investors actually falls on the syndicator. They may ask for certain requirements to see if an investor fits the bill before allowing them to participate.

There are two main ways to prove that you qualify as an accredited investor. One is by using your tax filings, IRS tax forms, or any other document that proves your actual and expected annual income. The second method is by calculating your net worth. [2]

Qualifications for Being an Accredited Investor

According to Regulation D of the Securities Act of 1933, an accredited investor is someone who has earned at least $200,000 in annual income over the past two years. For a married couple, they need to have a joint income of $300,000 over the past two years. [4]

An accredited investor may also be someone with a net worth that exceeds $1,000,000, but this value should exclude their primary residence.

According to the SEC’s Rule 506c, sponsors are allowed to syndicate their real estate deals as long as they are marketing to accredited investors. This gives accredited investors unique investment opportunities. [4]

However, the SEC has modernized their definition of accredited investors in order to allow more people to participate in syndication deals.

How the SEC Modernized the Definition of Accredited Investors

The SEC amended their definition of accredited investors in August 2020 in order to include more individuals.[4]

The SEC now also considers LLC companies with $5 million in assets accredited, along with state and SEC registered investment advisors. Knowledgeable employees of a private fund, including board members, general partners, and directors are also accredited investors. [4]

Family offices are now also considered accredited investors. The SEC has even expanded the definition to include the term “spousal equivalent”, for those who are not legally married.

The SEC also added a new category to include Indian tribes, government bodies, and funds and entities organized under the laws of foreign countries that own investments over $5 million. [4]

Because of the amended definition, more people can now fall under the classification of ‘accredited investor’ and can therefore participate in syndication deals that are exclusive to such.

This new definition now includes non-traditional couples, licensed investment professionals, and experienced investors. It gives more people access to exclusive wealth-building investment opportunities, including multifamily real estate investing through syndication deals.

It is worth noting that non-accredited investors are still able to join syndication deals according to Regulation D, Rule 506b, if they are considered a “sophisticated investor”.

A sophisticated investor is someone with sufficient experience and knowledge about financial and business matters. With their expertise, they can evaluate the advantages and risks of prospective investments including real estate syndications. [4]

Syndicators are also not allowed to advertise investments to non-accredited investors, meaning those who are sophisticated investors must use their network to find these investment opportunities.

Why HNW Individuals Get to Participate in a Real Estate Syndication Deal

A high net worth individual or HNWI is a person with liquid assets above a certain figure. Generally, HNWIs have at least $1 million in liquid financial assets. These are individuals with enough financial freedom to invest in a real estate syndicate or any other investment opportunity without much fear of the risks involved. [5]

Properties and fine art cannot be included in the calculation of a person’s net worth as only assets that can easily be liquidated are counted. HNWIs would often seek the assistance of financial professionals to manage their money.

Because of their high net worth, they have access to additional opportunities and benefits. It does without saying that HNWIs have enough money to qualify as accredited investors.

In 2020, the United States had the most HNWIs in the world, with more than 6.5 million people. [5]

Someone with a net worth of at least $5 million is considered a very high net worth individual, while someone with at least $30 million is an ultra-high net worth individual.

HNWIs enjoy more benefits such as services with reduced fees, access to special events, and discounts. On top of that, they can also freely invest in private deals such as multifamily real estate syndication. [5]

Why Invest with BAM Capital for Multifamily Real Estate Investing<

If you want to invest in multifamily apartment complexes without the headache of running them yourself, you should work with BAM Capital.

This Indianapolis-based syndicator has a strong Midwest focus, prioritizing multifamily real estate properties that are Class A, A-, and B++. BAM Capital uses an award-winning multifamily investment strategy that allows investors to grow their wealth through syndication. [6]

BAM Capital mitigates investor risk and uses a vertical integration strategy to create forced appreciation. They have a consistent track record of providing a safe and passive investment for their investors.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has over $700 million AUM and 5,000+ units. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions. Accredited investors can schedule a call with BAM Capital and invest today.

 

 

 

BAM Multifamily Growth & Income Fund III

BAM Capital created this fund in order to yield consistent and reliable cash flow, long-term appreciation, and accelerated tax benefits. The fund aligns with BAM Capital’s demonstrated track record of successful multifamily investing by continuing to implement our signature investment thesis, now in fund format. The fund aims for greater overall returns and lower risk through a multi-asset diversification strategy.

  • Consistent passive income
    Lower-risk assets with in-place cash flows with the ability to distribute preferred return after acquisition.
  • Significant tax benefits
    A cost segregation analysis allows for accelerated deprecation to years of ownership. This large passive loss gets passed onto investors through a K1.
  • Vertically integrated company
    In-house property management and construction allow for predictable cost reduction and value add.

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The contents on this site are for informational and entertainment purposes only and do not constitute financial, investment, or legal advice. BAM Capital cannot guarantee that the information shared on this post or page is appropriate for you and your financial situation. By using this site, you agree to hold BAM Capital and any and all entities related to the writing & publishing including BAM Capital’s parent company harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this site. Always consult your investment advisor, CPA, and other professionals before making an investment. BAM Capital is excited to help you grow your investment assets. Please contact us to see how we can help you.  

BAM MULTIFAMILY GROWTH & INCOME
FUND III OFFERING MEMORANDUM

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What is an accredited investor? Have earned upward of $200,000 (or more than $300,000 if jointly paired with a spouse) for each of the last two consecutive years & expect to earn the same in the current year. Possess a net worth of more than $1 million (either individually or in partnership with one’s spouse), not including the value of their primary residence.
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