Investing with syndications?

Question

I have a handful of rentals.  I am considering investing with a syndication.   I am not "accredited".  I understand I can become "sophisticated" apparently by spending $10K-20K.  What do I need to know?  Is it worth it to become sophisticated?  Is there a more frugal way to become "sophisticated". Is it worth it to become "sophisticated"?  is there a way around that?

Mohammed Rahman · Answer

Alright, here’s the quick lowdown. “Sophisticated investor” is more of a loose label than “accredited.” With accredited, it’s black-and-white: you need a certain income or net worth.

Sophisticated means you have “sufficient knowledge and experience” to evaluate an investment. It doesn’t require a license, but syndicators will sometimes ask for some kind of proof — like prior real estate experience, some course completion, or mentorship program.

The whole “spend $10K-20K to become sophisticated” is usually some guru selling you coaching, not a legal requirement. You technically don’t need to spend a dime if you already have real estate experience and can explain your understanding of the risks and benefits.

Many syndicators will take you on via 506(b) offerings if you can show you’ve done rentals or flips and understand how these deals work.

There’s no “certificate” for being sophisticated. It’s more about how you position yourself. Some people simply have a conversation with the syndicator, fill out a questionnaire, and that’s enough.

If a syndicator is requiring $10K+ just to prove you’re sophisticated, that’s a red flag. Spend your money on deals, not “sophistication.”

you probably already qualify based on your rentals. Just talk to the syndicator directly, skip the fluff, and see if they’ll accept you in their 506(b) deal. No need to blow cash on a label.

Evan Polaski · Answer

@Matt Williams

First, PLEASE DO NOT SPEND $10k+ to "become sophisticated".  Anyone that might be selling something making that claim is simply stealing your money.

As noted, there are lots of options out there.  If the goal is simply real estate exposure in a passive way, your options are:Registered company investments: Most common is public REITs.  Protections of various reporting requirements, analyst coverage, audits, any stock issue is underwritten, typically, by the major investment banks, who take the financial risk of floating the shares before the public buys them.

Non-traded REITs.  All the same reporting and audit requirements as public REITs, but sold through broker-dealer networks.  These allow anyone to invest, typically low minimums, but illiquid in nature.

Reg A(+) and CF offerings.  Less reporting than fully registered companies, but still more than the typical "syndication".  Allows non-accredited investors, with self affirmed confirmations that you are not investing more than 10% of your net worth.  These are sort of in between the fully registered offerings and the private offerings.

Reg D offerings: your typical syndication model.  506(b): self attestation of accredited status.  Up to 35 sophisticated investors.  most syndicators would take your ownership of owning rentals as being "sophisticated" but this is a subjective term.  As Don noted, no one will question you if you mark that you are accredited on their questionnaire. And the real issue here is that you understand the risks involved and are able to fully comprehend those risks, the investment structure, your potential liabilities, etc.

506(c): accredited investors only.  Typically this requires a third party verification letter of your status.  Biggest advantage here is groups can advertise offerings.  So, if you see a FB ad for "invest in this deal", that is a 506c investment.

But, beyond the more technical, as Greg noted, the biggest part of investing in syndications is understanding the operations.  The deal, the operator, the financing, the market dynamics, etc.  Most syndicators are great marketers.  They will sell you on the "class b property in a class b neighborhood, with strong value-add potential, bought with low leverage and at a great basis."  But in reality, it could be a high crime area 90 minutes outside the closest city, with very questionable tenant base.  The purchase price may be $50k/door, but that could equate to a 6% cap rate.  They are borrowing at 80% LTV on floating rate loans, with the whole deal relying on SOFR to drop to 2% to hopefully make money.  Cash flow is non-existent after debt service and those distributions they are projecting are all just financially engineered by over raising equity on the front end to pay you back, giving the appearance of cash flow.

Greg Scott · Answer

Many syndications are RegD 506(c) which would require you to be an accredited investor.

There are fewer RegD 506(b) syndications and those allow you to be accredited or sophisiticated.  However, the SEC has no formal definition of "sophisticated". Therefore it is up to the syndicator or the group you are investing with to decide if they think you are "sophisticated".

Frankly, if you don't understand these deals, you probably shouldn't be getting into them because there are plenty of bad ones out there that have gone to zero.  You should be able to identify the good ones and the good operators and have an understanding about how these deals are underwritten.  It is in your best interest to get some education if you don't know.

On the other hand, I have run across people who have invested in syndications and they have a hard time spelling real estate, and they clearly are not sophisticated investors.  They have gotten into deals.  I don't know if the ones they got into were any good, though.

Matt Williams · Answer

What about passive pockets, the sister company to bigger pockets?

Doug Smith · Answer

We did a Red D way back during the last big crash and slowly moved to more of a JV structure with a handful of investors that we built strong relationships with. For some reason, the powers that be see the words "high-net-worth" and "sophisticated" as the same. Obviously, they aren't, but that's the way it's viewed. If you are currently holding a handful of rentals, you're more sophicsticated than most. Hiring a guru to learn is not the answer. You're much better off partnering with someone that knows their poo as opposed to paying some guy that's never done a deal in their life to sit in the back of the Red Roof Inn on a Saturday to hear buzz words and work through Polyanna scenarios. Determine what you're looking for....passive income...knowledge...what are you looking for...and partner with a pro that's done it before. Put the guru money into a deal. Good luck to you.

Investing with syndications?

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