Multifamily Syndication: Accredited Investors Use Margin Loans with Assets as Collateral
Table of Contents
1. Accredited Real Estate Investors Use Margin Loans with Assets as Collateral
2. Potential Risks of Using Margin Loans with Assets as Collateral
3. What is a Multifamily Real Estate Syndication Deal?
4. One of the Best Real Estate Investments for Accredited Investors: Multifamily Syndication
5. Why Accredited Investors Love Working With BAM Capital for Multifamily Syndication
Accredited investors are individuals or entities that meet specific financial thresholds and are allowed by the US Securities and Exchange Commission (SEC) to participate in certain investment opportunities that are not available to the general public.
These investors are considered to have a certain level of financial sophistication due to their consistently high net worth and level of income.
Some accredited investors and real estate investment companies may choose to take a margin loan to potentially increase their returns. A margin loan is a type of loan offered by brokerage firms to their clients, allowing them to borrow funds to invest in securities, such as stocks, bonds, or mutual funds. The loan is secured by the investor’s existing assets held in their brokerage account. However this strategy also comes with a significant level of risk.
When accredited investors use margin loans, they pledge their existing investment holdings as collateral for the loan. This means that the securities in their brokerage account serve as security for the borrowed funds. If the investor cannot meet the margin call (a demand for additional funds or collateral) or if the value of the collateral falls below a certain level, the brokerage may sell the assets to cover the loan.
Here we will discuss how this works, and why you should consider alternative investment opportunities, especially if you are a real estate investor.
Accredited Real Estate Investors Use Margin Loans with Assets as Collateral
A margin account is different from the usual cash account. When we say “cash account”, it refers to a brokerage account wherein the investor or real estate investment company has to pay the entire amount for the securities they purchased. On the other hand, a “margin account” refers to a brokerage account wherein the broker lends cash to purchase securities but takes collateral in the form of the account. Securities purchased this way are called margin securities. [1]
Keep in mind that brokerage firms often let investors have these two account types at the same time.
Here is an example of how margin works. If an investor spends $50 to buy a stock and then the price increases to $75, they will earn a 50 percent return on their investment if they used a cash account to buy it and then fully paid for it. The 50 percent return represents the $25 gain, which represents 50% of the initial $50 investment.
However, if the investor bought this stock using a margin account by borrowing $25 from their broker and then paying $25 in cash, then they will earn a 100% return on the money they invested. This is because the $25 return is 100% of the initial $25 investment. [1]
Take note that this is just an example and does not consider the interest you owe your broker, for simplicity’s sake.
Using margin loans allows investors to leverage their existing assets to make larger investments. This can amplify potential returns if the investment performs well. Margin loans can provide access to cash without the need to sell investments. This liquidity can be useful for various purposes, such as funding other investments, covering expenses, or taking advantage of investment opportunities.
Accredited investors can also diversify their investments by using margin loans to access investment opportunities while keeping their existing assets intact.
In some cases, the interest on margin loans may even be tax-deductible, which can provide tax advantages for the investor.
Of course this strategy is not foolproof. There are downsides to this approach as well. The downside is that when you use margin loans and the stock market prices suddenly decrease, then your losses will also increase significantly.
From time to time, the broker may require investors to give them additional securities or cash if the stock price falls. This is called a margin call. Investors should remember that their securities that were bought on margin can be sold by the brokerage firm without any prior notification. [1]
So while investors can enjoy benefits like additional leverage and diversification, there are also some risks to consider when using margin loans. Accredited investors can use margin to increase their purchasing power and buy more securities than they could with their own capital alone. This can amplify potential gains but also magnify losses.
Potential Risks of Using Margin Loans with Assets as Collateral
It is essential that investors know how risky margin accounts can be. They are not appropriate for everyone. Before opening a margin account, investors should remember that it can cause them to lose more money than they have invested and that it may force them to sell some or all of their securities when their securities lose value due to falling stock prices. [1]
Another significant risk to keep in mind is that the brokerage firm may sell your securities without prior consultation with investors. They typically do this to pay off your margin loan. Investors are unable to choose which securities are sold by their brokerage firm.
Brokerage firms may even increase their margin requirements at any time—again, without the need for advance notice.
Ask your broker whether trading on margin is appropriate for you based on your current financial resources, risk tolerance, and investment strategy.
What is a Multifamily Real Estate Syndication Deal?
There are many ways to invest in real estate if your goal is to diversify your investment portfolio. Some investors go for commercial real estate while others purchase residential properties and rent them out. While a margin account may be used for some real estate investments, this is not always the best approach.
For example, accredited investors have access to exclusive investment opportunities, and that includes multifamily syndication. While multifamily syndication is considered one of the best investments in real estate, it is not usually associated with margin accounts. Margin accounts are usually associated with trading securities like stocks.
In the context of multifamily syndication, you would not typically use a margin account because you are not buying and trading securities on margin. Here’s how multifamily syndication works:
Real estate syndication is a deal in which several investors pool their funds together in order to buy a single real estate property. This real estate deal is arranged by a sponsor or syndicator who serves as the general partner. They are responsible for locating the property, coordinating the transaction, putting the deal together, and even managing the investment property once the deal is in place. If you are looking to become a passive investor in real estate, this is the ideal approach. [2]
Passive investors provide the majority of the funds needed to purchase the property in exchange for the monthly cash flow and—depending on the deal structure—a share of the equity upon resale. Every real estate syndication deal is different.
While syndication deals can be done with any type of real estate, multifamily syndication is the most popular because of the various benefits of owning multifamily real estate.
Multifamily properties like apartment complexes and condominiums have plenty of units, which means it can generate a stronger and more reliable cash flow. Investors also don’t have to worry as much about vacancies because there are several units occupied by tenants, meaning they can continue to provide rental income even if some units become temporarily vacant.
Multifamily investors enjoy syndication because it is a safer form of investment. [2]
One of the Best Real Estate Investments for Accredited Investors: Multifamily Syndication
Multifamily real estate syndication comes with several benefits. It solves two of the biggest hurdles that investors face when it comes to multifamily investing: one is the fact that multifamily properties are more expensive than other types of real estate, and the fact that real estate investors often have to play the role of landlord after purchasing an apartment building.
With multifamily syndication, investors pool their resources together, reducing the minimum investment amount and making it possible to invest in properties that are otherwise too expensive for a lone investor. Some private real estate funds require a sizable minimum amount of cash upfront from investors. Comparatively, real estate syndication has smaller minimum investment amounts. [3]
This eliminates the large barrier to entry that is usually associated with multifamily real estate investing.
When it comes to returns, real estate investments are generally stable, meaning syndication can be an excellent long-term investment. Multifamily properties often generate consistent rental income, providing investors with regular cash flow. This can be especially appealing for those seeking passive income streams. [3]
Not only is real estate syndication a predictable source of passive income, it is also generally safer than owning a property. Sharing the financial burden with other investors can help mitigate individual risk. If one property in the syndication underperforms, the impact on each investor is less significant compared to owning the property outright.
And because the syndicator takes care of property management, investors can treat this as a passive investment. You no longer have to deal with emergencies, rent collection, and tenant concerns because the syndicator or the property management company will handle it.
Syndicators typically hire professional property management teams to oversee day-to-day operations, reducing the burden on investors. This allows investors to enjoy the benefits of real estate ownership without the hassles of property management.
After the initial investment, the project requires no further attention from the investor. Therefore, your involvement in this deal will be front-heavy, meaning most of your work is done before you invest in it. You will have to do your due diligence and study whether or not the syndication deal is good for you and your investment strategy. This goes for a lot of passive investments. Unlike real estate investment trusts (REITs), syndication deals allow you to choose which property to invest in. [2]
If you are interested in a particular real estate syndication deal, you will have to pay close attention to various factors such as preferred returns, fees, financing options, and how profits will be split. Real estate syndication deals are often structured as a limited liability company (LLC) or as a limited partnership (LP). These are the two most common structures for syndications. [2]
With the right syndication deal, you can enjoy a consistent source of passive income while diversifying your portfolio. By pooling resources, investors can access larger, more diversified properties than they might be able to on their own, spreading risk across multiple units and locations.
Multifamily syndication even offers a few tax benefits, including depreciation deductions, interest deductions, and the potential for tax-deferred exchanges. Syndicators typically structure deals to maximize these tax benefits for their investors.
Syndicators often have specialized knowledge and experience in real estate investment, property management, and market analysis. Passive investors can benefit from the syndicator’s expertise and may not need to be actively involved in the day-to-day operations of the property. The key is to work with a syndicator with a proven track record.
For those who prefer a more hands-off approach to real estate investing, real estate syndications offer a way to passively invest in real estate deals. Work with BAM Capital to find the right syndication deal for you.
Why Accredited Investors Love Working With BAM Capital for Multifamily Syndication
Real estate syndication can be considered a form of real estate crowdfunding and is much safer and easier compared to direct real estate investing. That said, you still need to perform your due diligence by choosing a reliable syndicator with a proven track record.
These deals are only accessible to accredited investors because they have the net worth, income, and investing expertise to assess real estate syndications. Accredited investors love working with BAM Capital.
This Indianapolis-based company has a strong Midwest focus, prioritizing high quality multifamily properties that are Class A, A-, and B++. BAM Capital only chooses properties with proven upside potential and in-place cash flow. They then use their award-winning investment strategy to create forced appreciation, helping accredited investors grow their wealth while mitigating risk. [4]
This strategy is partly why BAM Capital now has over $700 million AUM, and 5,000+ units, while also being one of the most trusted syndicators in the industry.
BAM Capital is a vertically-integrated company that has already established itself as a leader in the industry. Being vertically-integrated means that this syndicator can guide investors through every step of the syndication process, from purchasing high quality multifamily real estate to renovating and managing the property. BAM Capital will guide you from start to finish. [4]
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.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.
