Investing In Real Estate Passively As An Accredited Investor
When you are investing into real estate passively through a Syndicator/Sponsor, you are not buying real estate. You are buying shares (private equity or stock securities) in a corporation (most commonly an LLC) that owns the real estate. Basically, you are buying a portion of the LLC as a Limited Partner.
The SEC (Securities & Exchange Commission) highly regulates the selling of securities and requires them to be registered through a very costly, time consuming, and complex disclosure process. However, the SEC allows Syndicators to “skip” the registration process if they are raising funds with Accredited Investors or “Sophisticated Investors.”
So, who are Accredited Investors and Sophisticated Investors?
According to Regulation D of the Securities Act of 1933, an Accredited Investor is an individual or entity that is allowed to invest in opportunities that are not registered with the SEC. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, or professional experience.
These requirements include:
individuals with earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, OR
has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of their primary residence), OR
any Trust with assets in excess of $5M, OR
any Entity with total investments in excess of $5M, OR
any Entity in which all the owners are Accredited Investors, OR
holds a good standing Series 7, 65, or 82 license.
If you are not an Accredited Investor, you can still invest with Syndicators if you are considered a Sophisticated Investor. The other part of Regulation D is Rule 506(b)(2)(ii), allows investors who don’t check off any of the Accredited Investor boxes, but are “sophisticated” to invest in a syndicated real estate investment. To be considered sophisticated the rule requires that each non-accredited investor possess “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” This is not a great group for syndicators to raise money from, but provides a carve-out for people who are truly friends and family and would not otherwise have access to invest in real estate.
About the Author
Jonathon Dilworth is the Principal of C&D Partners, a real estate development and investment company that specializes in value-add multifamily investing in the Western United State and for-sale spec single-family-home development in Culver City, CA.
