All Forum Posts by: Jim Pfeifer

As evidenced by the different opinions on this post I don't think it's at all black and white.  Accreditation in general is not black and white.  Each syndicator makes their own decision how they are going to confirm accredited status - that might not be the intent of the regulation, but that is how it happens in practice.  It's really just a CYA approach for many syndicators.  Some require a letter from a financial professional, some require asset or W2 verification and others allow the investor to attest to the status. So if sponsors are willing to accept passing the 65 as a standard for showing accreditation, then the test will be all you need.  Some might require a broker affiliation, or Registered or licensed by the state.

My opinion doesn't matter as far as accreditation, but it really is just an arbitrary qualification that does more to exclude investors than protect them.  There is nothing that makes someone with a salary of $300,000 or assets of $1M that makes them a better or worse investor than someone with less wealth - the wealthy might just be able to "afford" their mistakes a bit better.  This rule is more exclusionary than anything else, so if you can take the 65 and find sponsors who will let you invest with them - as long as you are educating yourself about the investments - I say go for it!

It was mentioned earlier, but many active real estate investors find success transitioning to passive investing in real estate syndications.  It gives you some time freedom as you are essentially hiring professional asset managers to manage the properties for you.  You might give up a little in returns, but not as much as you might think.  Rather than constantly doing a 1031 into larger and larger properties, you can do the "Lazy 1031" and sell some active properties and defer the gains by investing in syndications and using the depreciation to offset the gain.  That was how I exited active RE investing and began my passive journey.  It takes some effort and education up front, but it becomes quite passive pretty quickly.  Then you can decide what you want to do with your time - buy a franchise, travel, give back - passive investing gives you time freedom so you will have plenty of options!

I think the first thing to decide is how active do you want to be? I learned that owning small multifamily and even SFH - it isn't passive. You need to manage the property manager and I never found a way to make that passive and be successful. I now invest exclusively in real estate syndications. They are long term and highly illiquid, but you are relying on a professional asset manager to provide the returns - and even in a difficult market, if you qualify them properly they will certainly do better at managing the properties than I did. If you don't want to buy yourself another job, passive investing might be a good option for you. There are plenty of Communities that can help you get started!

There are a lot of great Communities out there whose members are passive investors - many  in these groups are accredited, some aren't.  It depends on why you are looking for the investors I think - if you are a GP looking for people to invest with you, some Communities will allow you to become a member and others won't.  If you are an investor looking to learn and build your network, then these Communities are a great place to start!

My first question, aside from the home equity issue would be do you want to invest passively or actively? Using your HELOC for passive syndication investing is a great way to generate cash flow, get some appreciation and pay off the loan using the cash flow from the investment. You can use your HELOC actively as well.

Whether you want to do a full refi or a HELOC depends on your situation and the interest rate and terms you can get. I prefer to go the HELOC route because you can use it like a checkbook and only use it when you need it. For example, let's say you get $200,000 in a HELOC. While you are looking for investments, you do not need to pay any interest because you haven't taken any money yet. With a full refi you will be paying P&I from the start - you will need to pay that bill if you decide to use the money or not. With a HELOC you can use the cash, replenish and use it again.

As an example, if you invest $50,000 in a real estate syndication and your HELOC interest rate is 4%, you will need to pay the bank $166.67 per month. A typical syndication might pay you 8% (probably starting a few months after you invest) so you are collecting $333.33 per month. You can take half of that and pay off the interest on the loan. The other half you can save or pay down the principal on your HELOC loan. Let's assume after 5 years, the property sells and you are returned $75,000 and assume you have only paid down the interest on the loan, but not the principal. You take $50,000 to pay off the principal and you are left with $25,000 plus you had 60 months of earning $166.67 per month of a total of $10,000. You basically earned $35,000 using zero cash of your own. What's the return on that?!

It gets even better because it's likely you didn't pay any tax on the $10,000 because of the depreciation offset and if you reinvest the principal and/or proceeds you can avoid paying take on the $25,000 gain as well.  My CPA calls that the Lazy 1031, but that's a different story.

I use my HELOC and high cash value life insurance to invest this way in multiple syndications - it's leverage and arbitrage and allows you to create wealth using "lazy" money.

I think you started in the right place - The Hands-Off Investor is a fantastic book and I couldn't agree more that choosing the syndicator is a critical step in being a successful passive investor.  

After being a full time passive investor in syndications for a few years, I have found that the most important factor in my success has been being part of a Community or a network. These are illiquid, very long term investments - you can't just sell your position if you need the money and you won’t know if it’s a good deal or a quality sponsor possibly for years after you invest. As you noted, it is critical to find superb sponsors to invest with and you can't afford to invest and watch the sponsor for five years before you find out how good they are. This is where a Community or a network is invaluable - you can use the experience of others in your Community to find the best sponsors, markets and asset classes. You can talk with people you know, like and trust and have them recommend sponsors they have already invested with. I haven't found a better way to find quality sponsors - and before I found a Community I tried everything to properly vet sponsors with average success at best! There are quite a few groups out there - you just need to find one that matches your personality and your needs - you will find many like-minded people with experience if you build a network and join a Community!

I think there are some gray areas here.  @Matthew M. is correct that the SEC says you need to be "licensed as an investment advisor representative" but each state is different in what that means.  However, the 65 is the only test that does not require you to be sponsored by a broker-dealer - this implies that you could be an RIA and hold the Series 65 and not be affiliated with a firm and perhaps qualify as an Accredited Investor.

https://www.investopedia.com/a...

Checking and confirming accreditation is the responsibility of the syndicator - some are very specific about how they qualify someone and others are not.  Personally, I don't think being non-accredited should be an obstacle to someone investing in any syndication - having a certain salary or net worth doesn't mean you are any smarter in your investment choices, it just means you might be able to "afford" to lose more money than someone with lesser net worth or income.  I think if an syndicator will accept you as accredited through having the Series 65 and your state allows you to hold the RIA designation by taking that test, that should be good enough.  In my mind the status of Accredited investor is arbitrary and excludes plenty of qualified investors from these investments and if they can qualify by taking the Series 65 and sponsors are willing to accept them - people should absolutely do it.  The question that has yet to be answered, is how will a sponsor react to someone with this designation? 

I am not an expert here, but my understanding is that the Series 7 requires you to be sponsored by a member firm - so you would basically need to be a financial advisory working with an advising firm.  The Series 65 does not have that requirement - anyone can take it.  That, and it is a much easier test to pass than the 7.  Both will get you accredited but the Series 65 might be the way to go for anyone who is not looking to work for a financial advising firm.

I run a group called Left Field Investors, another group is 506 Investor Group, and Wealth Formula Network - I am active in all three. There are also quite a few groups who focus on medical professionals. I think the most important thing is to find a group that fits with your personality and style. I hope that helps!

I think the best thing you can do to find quality sponsors is to build a network and join a Community. Syndications are long-term, illiquid investments. You won’t know if it’s a good deal or a quality sponsor possibly for years after you invest. I have found the best way to find great sponsors is to be referred by people you know, like and trust who have already invested with the sponsor. You will find many like-minded people with experience if you build a network and join a Community!