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Big News For How The SEC Defines an Accredited Investor. Access To Capital Act 2024
Real estate investing is considered a lucrative opportunity for investors seeking to diversify their portfolios while building wealth over the long term. While there are many ways to invest in real estate, apartment investing is among the most popular. It is so popular in fact that many investment professionals are recommending apartment investing to grow their client’s wealth in a turbulent economic environment.
Apartment communities are multifamily properties that hold a unique appeal for investors. From steady cash flow to potential tax advantages, there are several benefits to investing in apartments that make them an attractive option for both seasoned investors and those just starting out in the real estate market.
Apartment investing involves purchasing and managing residential multifamily properties with the goal of generating rental income. Investors can also profit from the appreciation in property value when it is time to resell the property.
Unlike single-family homes, apartment investing typically involves larger properties with multiple units, ranging from a few units to several hundred.
Just from the sheer number of units, we can see that investing in apartment communities is no walk in the park. Real estate investors should be aware that apartment investing is a big commitment. In fact, it is sometimes described as a career rather than just an investing strategy. [1]
The process of apartment investing begins with identifying suitable properties based on factors like location, market conditions, potential rental income, and property condition. Once a property is acquired, the real challenge begins, which is property management.
Being a landlord is not easy especially when it comes to multifamily properties because there are multiple tenants and units to manage. It requires a deeper level of involvement, both physically and financially. [1]
Despite the challenges, many people still choose to add multifamily properties to their investment portfolio, and it is worth discussing the reasons behind this. Here are some of the benefits of investing in apartment communities.
Definition Of An Accredited Investor
An accredited investor is a person or entity that fits certain criteria set by the US Securities and Exchange Commission (SEC), allowing them to participate in certain investment opportunities that are not publicly available.
Accredited investors are deemed to have the financial sophistication and capability to assess investments that have a higher risk compared to traditional investment opportunities. Thanks to their net worth and income, they also have a financial cushion in case these investments do not work out.
The Securities and Exchange Commission (SEC) defines an accredited investor under Regulation D of the Securities Act of 1933.
An individual is considered an accredited investor if they have either a net worth exceeding $1 million, excluding the value of their primary residence, or if their income exceeds $200,000 ($300,000 for joint income) for the past two years with the expectation of earning the same or higher income in the current year. [2]
Certain entities can also be considered accredited investors, including certain financial institutions, trusts, and corporations, based on their assets or financial structure.
Aside from the financial criteria, there are also professional criteria that can help someone qualify as an accredited investor. For example, investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82) can be considered accredited. [2]
Accrediting investors is supposed to help protect individuals from investments that may be too complex or risky for their financial situation. By limiting certain investment opportunities to accredited investors, regulators aim to ensure that those participating in such investments have the financial means and knowledge to understand the risks involved.
This designation is often seen in private placements, hedge funds, venture capital investments, and real estate syndication deals.
Why Are Some Investments Limited to Accredited Investors?
Some investments are limited to accredited investors due to regulatory requirements aimed at protecting less experienced or affluent investors from the higher risks associated with certain types of investments.
Meeting the specific criteria set by the SEC means that accredited investors have the income, net worth, or professional experience necessary to make informed decisions and bear the risks involved. [3]
Many alternative investments, such as hedge funds, private equity, venture capital, and real estate syndication deals, require a significant level of financial sophistication and understanding to evaluate properly. [3]
These investments may involve complex strategies, illiquidity, and generally higher levels of risk compared to more traditional investments like stocks and bonds. These restrictions help prevent less experienced or financially vulnerable investors from being exposed to investments that may not be suitable for them.
It is worth noting that there is no actual accreditation process that investors have to go through. If you meet the criteria, you can participate in these exclusive investments. The burden of verifying your status as an accredited investor is on the company offering the security. They may ask for certain documents and financial statements to confirm your status.
Private Equity Funds
Private equity funds are one of the investment vehicles that are typically exclusive to accredited investors. These funds pool capital from accredited investors to invest in private companies, often with the aim of acquiring, restructuring, or expanding those businesses.
Investing in a private equity fund means investing in a fund managed by a private equity firm. They are similar to a hedge fund or a mutual fund in that they are pooled investment vehicles. The difference is that private equity firms typically focus on long-term investment opportunities. They usually go for assets that take time to sell with an investment time horizon of 10 or more years. [4]
Private equity investments can involve significant risks and often require substantial capital commitments, which is why they are typically limited to accredited investors.
This exclusivity allows private equity funds to operate with fewer regulatory restrictions, offering potentially higher returns but also carrying higher levels of risk compared to more traditional investment options.
Hedge Funds
Hedge funds are a type of investment vehicle that typically employs more complex strategies than traditional investment funds. Their aim is to generate higher returns for their investors. They often engage in activities such as short selling, leverage, and derivatives trading to achieve this goal.
A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers. Just like private equity funds, they require a high minimum investment, which is why they typically target high-net-worth individuals (HNWIs). [5]
Due to the sophisticated nature of these strategies and the potential for higher risk, hedge funds are typically restricted to accredited investors.
Venture Capital Funds
Venture capital funds are among the most prominent investment avenues exclusive to accredited investors. These funds specialize in financing early-stage, high-potential startups with the aim of achieving substantial returns on investment (ROI). [6]
By participating in venture capital funds, accredited investors gain exposure to a diversified portfolio of promising startups across various industries. With this, they can potentially reap significant financial rewards if the companies they invest in succeed. [6]
Additionally, venture capital funds often provide access to seasoned investment professionals and strategic networks, enhancing the potential for successful investment outcomes.
However, it’s important to note that these investments still carry high risks, including the possibility of total capital loss. They often have less regulatory oversight than publicly traded securities, which means accredited investors should understand the risks associated with them.
Angel Investments
Angel investments typically refer to early-stage investments made into startup companies by high net worth individuals, who are referred to as angel investors.
An angel investor provides the initial seed money for startup businesses, usually in exchange for ownership equity in the company. The angel investor’s involvement may be a one-time infusion of seed money, but it can also be an ongoing injection of cash to help get a product to market. [7]
While anyone can invest in startups through crowdfunding platforms or venture capital funds, certain investment opportunities may be exclusive to accredited investors.
Exclusive angel investment opportunities for accredited investors may include access to certain private placements, syndicated deals, or investment rounds led by prominent angel groups or venture capital firms.
These opportunities often offer higher potential returns but come with greater risks due to the early-stage nature of the companies involved. Angel investors put their money into ideas that they like, with the expectation of a reward only if the business takes off. [7]
Best Multifamily Investment for Accredited Investors: Real Estate Syndication
For accredited investors, one of the best investment options available to them comes in the form of real estate syndication, specifically multifamily syndication.
Investing in a multifamily property typically comes with several benefits like diversification, appreciation, and a strong cash flow.
However, being the owner of a large multifamily property like an apartment community or a condominium takes a lot of work. You will have to take on all the responsibilities of a landlord. So while it can be a good source of passive income, it is not a completely passive investment.
This is where real estate syndication comes in.
Real estate syndication is an alternative way to invest in real estate and add it to your portfolio without the usual headaches that come with being a landlord.
A syndication deal is arranged by a syndicator, also known as a sponsor, who puts the deal together and serves as the general partner (GP). They locate the investment property, conduct their due diligence, create a business plan, and then look for accredited investors who will participate in the deal. [8]
The investors will then put their financial resources together to provide most of the capital needed to purchase the property. In return, they get a share of the real estate property’s monthly rental income, and depending on the deal structure, a share of the equity upon resale. Family office real estate investing is one of BAM Capital’s specialties. Working closely with HNW families and their professional portfolio managers, BAM Capital can provide a clear road map for the future and historical performance.
Every deal is different, and investors should still conduct their due diligence to fully understand how the syndication works, including the profit split.
A syndication deal can be done with any type of real estate, but multifamily syndication is the most popular due to the strong and consistent cash flow generated by these larger properties. Apartment buildings generate income continuously, and are generally unaffected by vacancies, unlike single family homes. [8]
Multifamily properties are also larger and more expensive, making them harder to acquire and harder to manage for a lone investor. Multifamily syndication makes these properties more accessible since you don’t have to bear all the risks of being the lone owner. You only have to worry about your share of the capital.
As limited partners (LPs), accredited investors have limited liabilities and responsibilities in the syndication deal. You don’t have to worry about repairs, maintenance, rent collection, and tenant relationships because the syndicator will also take care of property management. [8]
The syndicator will either take care of the property’s daily operations themselves or hire a third party property management company. In any case, you don’t have to worry about any of that.
Real estate syndication is a good way to earn the benefits of owning real estate without dealing with the responsibilities and challenges that usually go with it. This is a true passive investment in real estate.
Keep in mind that no investment is without risk. This is why syndication deals are typically exclusive to accredited investors. Even though multiple investors are involved, they still require a significant amount of capital.
Investors in a syndication deal should also be comfortable with some illiquidity because these investments tend to last several years.
Real estate syndication makes it easier for investors to participate in large multifamily investments that are normally too risky or out of reach. Even HNWIs may think twice about purchasing a large condominium or apartment building all by themselves. But through multifamily syndication, they can add real estate to their portfolio while still having enough time to focus on their other priorities.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
Accredited investors have access to exclusive investment opportunities. Therefore savvy investors need to take advantage of it by finding the best investments that fit their financial goals and preferences.
For accredited investors who wish to add multifamily real estate to their portfolio, multifamily syndication may be the best option.
Accredited investors have the financial sophistication and investing knowledge to assess these deals, which is important because due diligence is still necessary. As an investor, you need to find and work with a trustworthy syndicator.
The passive nature of multifamily syndication means that the syndicator will be doing most of the work. While they will keep investors informed on the property’s performance and condition, it is still the syndicator who makes all the decisions in the deal.
It is important to work with a syndicator with a track record for excellence. Work with BAM Capital.
BAM Capital is an Indianapolis-based syndicator with a reputation for being an industry leader. Accredited investors love working with BAM Capital because they prioritize Class A, A-, and B++ multifamily properties with proven upside potential and in-place cash flow. [9]
BAM Capital uses its award-winning strategy to mitigate investor risk while creating forced appreciation. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [9]
As a vertically integrated company, BAM Capital can handle every step of the syndication process. From acquiring high quality multifamily properties to renovating and managing them, BAM Capital can guide you through the entire thing.
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 multifamily syndication, schedule a call with BAM Capital and invest today.
Sources:
[2]: https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
[3]: https://www.investopedia.com/terms/a/accreditedinvestor.asp#
[5]: https://www.investopedia.com/terms/h/hedgefund.asp
[6]: https://www.investopedia.com/terms/v/venturecapital.asp
[7]: https://www.investopedia.com/terms/a/angelinvestor.asp
[8]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important
