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?

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.

Jason Malabute · Answer

506(b) offerings do allow for sophisticated investors, but based on my understanding, you can’t simply “buy” your way into becoming sophisticated. As Don mentioned, a sophisticated investor is typically someone who is an attorney, accountant, investment professional, or someone already involved in the deal.

From my own experience as a general partner on two deals, I’d say you really have to understand what you’re doing before getting into syndication deals—there’s a lot of risk involved. As a limited partner, you have no control over the deal, so you’re betting on the jockey, not the horse. If your sponsor doesn’t have the funds to cover shortfalls, it doesn’t matter how strong of an investor they are—it can still become very challenging.

Lastly, you have to take into account where the market is right now. It’s tough to beat the market, and timing plays a huge role in how these deals perform.

Ian Ippolito · Answer

Hi Matt, this isn't the answer you want to hear.  But in my opinion you should not be investing in syndications unless you're accredited.1) Accreditation essentially demonstrating high income/net worth. So the whole point of requiring accreditation for 99% of syndications is that these are investments that require alot of expertise do to due diligence on (which most people don't have and thus makes them riskier to most people).An accredited investor can lose that money and it may hurt alot ... but it's not the end of the world. It's not the same for a non-accredited investor.  Additionally, most require lockups of many years (which again is difficult for 99% of non-accredited investors to do).2) As you know (and others have pointed out) sponsors who run accredited investor funds under rule 506(b) are technically allowed to accept up to 35 nonaccredited investors into the offering.However, in practice, very few sponsors will actually do this. That's because adding nonaccredited investors to a fund *legally* often requires mega-amounts of disclosure which typically can cost "easily in excess of $50,000/year". And, non-accredited investors (by definition) don’t have alot of money to invest and aren’t going to be putting in much (compared to accredited inventors). So generally, a sponsor would take a loss on them (and even more so when taking into account how non-accredited investors will typically require a lot more handholding and time).So there generally aren't alot of choices.  And they tend to be mostly those who are newer sponsors and/or more desperate for capital. And when that's the case, that's probably not the type of sponsor most non-accredited investors are targeting.3) There are plenty of other crowdfunding vehicles that are similar to syndications but are designed to allow non-accredited investors. And some (like BREIT, etc.) are among the largest real-estate funds in the world.I personally have issues with BREIT for other reasons (and as an accredited investor I feel there are many, better options).  But if I were non-accredited, then I would probably focus on those (versus paying a so called "guru" $10k-$20k to supposedly become "sophisticated").

Todd Dexheimer · Answer

Our 506(b) offerings allow for up to 35 non-accredited investors and we have a handful or 2 non-accredited investors that invest in most of our offerings, but there are a few things that must be true:

1. They need to qualify as sophisticated. This is not a test and doesn't take $10-$20k. They need to fully understand what they are investing in. This is more of a feeling out process, with a little bit of data. Rental property owners, financial advisors, CPA's are easier to "qualify." One of our rules among others, is that you need to receive and read our newsletter prior to investing.

2. You need to have a relationship with the GP. This can be a pre-existing relationship or a newly established relationship. We won't let a non-accredited investor jump in until they've had at least a personal conversation with me and have been on our mailing list getting emails for several months. They also can't jump in on the first new deal that they see.

3. They can't invest their entire liquid capital.

It's best practice to form a substantive relationship and get to know their financial awareness and capability before allowing them to invest!

Chris Seveney · Answer

You can also look into regulation a+ offerings which accept non accredited. Like anything you invest in do your due diligence and make sure you understand what it is you are investing in

Chris Seveney · Answer

There are several investment clubs around - passive pockets may have some, Brad Bebout I believe runs one, spark is another who you can find here on BP.

I am not part of them so I cannot comment as to their strategy, cost etc. But those are some I am familiar with.

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.

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.

Investing with syndications?

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