Raising capital for real estate investments can be a challenge for both new and seasoned investors. Experienced capital raisers claim that even after multiple successful raises, they don’t always know how much they are going to be able to raise on their next real estate investment. This is proof that it’s common for real estate investors to be fearful and uncertain about where they’re going to get the funds they need.
Real estate syndication is one of the best and most secure ways to get into the market. It enables investors to get the benefits of owning an investment property without dealing with the hassles or stress of being a property owner. Before venturing into real estate syndication, you need to have a business plan to avoid getting lost.
Eligibility Requirements for Real Estate Syndication Investing
Passive investors must meet stringent eligibility conditions before venturing into real estate investing. Generally, you must be an accredited or sophisticated investor to participate in real estate syndications.
To be considered part of accredited investors, you must have an annual income of at least $200,000, or $300,000 if you have a spouse. On the other hand, sophisticated investors must have at least $1,000,000 to qualify. Likewise, they must have extensive knowledge and expertise to be eligible.
How to Raise Capital For Real Estate Investing
Knowing the eligibility requirements for real estate investing, you should have a basic idea of how to invest wisely in real estate syndication deals. It is important to ensure you’re actively collaborating with other passive investors, preferably those interested in the same asset class. Developing contacts with like-minded investors will assist you in providing suggestions for reputable real estate syndication companies with a proven track record in the sector.
1. Decide what type of investor you will target.
This is a key decision. There are two types of investors: accredited and non-accredited investors. This is important because when someone invests in a multifamily property, they’re actually investing in security because they own shares in an entity that owns the property. Non-accredited investors can also participate if they are “sophisticated investors.” You’ll also have to have a preexisting relationship with each investor. The time to build that relationship is long before you have a deal to offer.
2. Find investors.
Understand that people invest in people, not the opportunities that are presented. Investors have to like you, but more importantly, trust you, so start by reaching out to your own power base. It could be colleagues, friends, coworkers, family, or people you’ve done business with in the past. Let them know you’re syndicating real estate opportunities and arrange to meet with them.
3. Get to Know Syndicates by Performing Due Diligence
You should be sure to determine whether a real estate syndicate specifies that its participants be accredited or sophisticated investors. The majority of syndicates are structured with one of the following two SEC Rules:
- Rule 506(b).
This rule requires that investors be sophisticated. This simply means that such investors must have a thorough education in finance. A limitless number of accredited inventors may be accepted for syndication property deals. This rule permits sponsors only to offer new property investments to their current client base. If you are interested in property investing through a syndicate, you must build a good relationship with the sponsor. You can also learn about many valuable aspects of syndication property deals by getting to know the more experienced investors and the sponsor in a syndicate.
- Rule 506(c).
This type of property investment specifies that all investors must be accredited and have a net worth of at least $1 million, not counting home property values. Investors may also qualify with incomes of $200 K as a single person or $300 K if married. Rule 506(c) investments also require verification, which is typically given by a CPA or by a qualified third party.
4. Examine a Syndicate’s Rate for Preferred Returns and Dividends
Take time to examine and assess a syndicate’s rate for preferred returns and dividends before making a commitment to invest your capital. Stabilized real estate typically produces revenue in the form of rents paid by tenants. Sponsors of these syndication deals often provide a preferred return to their passive investors. The return increases at a predetermined rate. Prior to any profit-sharing when the property is eventually sold, the return must be issued.
5. Prove Your Potential
On the other hand, you need to make your investment sound appealing. Savvy investors with bigger pockets and heavy-weight venture capital firms are, of course, intrigued by the promise of big wins. So while keeping projections conservative, don’t be afraid to hint at the full upside potential of those big numbers you are hoping you’ll really hit.
6. Procure A Great Deal
Everyone wants a “deal.” There are two reasons for this. The first is that it is simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value. The second is that these individuals and money managers want to look smart and feel like they are making a sound investment. They all have someone they need to impress. It could be their boss, co-worker, spouse, competitor, or even themselves. Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high-yielding or trendy investment before everyone else. Help them out.
7. Provide Your Track Record
Of course, most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you don’t have direct experience in real estate investing, what other relevant experience do you have or who else can you partner with? Have your portfolio ready to go with your successes on top. You’ve got to have the numbers to prove yourself.
What Is a Real Estate PPM?
A private placement memorandum, or PPM, is a form of documentation that discloses everything an investor should know when making a decision on whether to provide funding. Separate and distinct from the conventional business plan, a PPM will detail the various aspects of the investment option, disclaiming legal liabilities, and providing the underlying risk factors that may be associated with the venture.
Real estate PPMs may include data about: the offering structure; expected location of the real estate assets; the type of real estates, such as residential or commercial; the criteria used to identify the real estate assets; the bios of the people involved; and other information about the intended real estate asset mix.
The PPM should also include the following:
- Subscription agreement,
- Investor questionnaire, and,
- The form of debt or note the investors will purchase.
Private placement memorandums are crucial because they offer the vital information an investor needs to make a crucial decision about their involvement with the future of a real estate enterprise. Because they are “stand-alone” documents, individuals only need to have a professionally drafted PPM as the self-contained instrument to help the investor make an informed decision.
Summary
Understanding how to raise capital is an integral step to achieving financial freedom through real estate investing. Many investors focus so hard on highlighting properties that they forget to present their strengths. Raising capital for real estate comes down to learning how to present yourself and your investing business. The key to financing a deal is demonstrating how you will take care of their money and return it with interest.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
What is the eligibility requirements for real estate syndication Investing?
To be considered part of accredited investors, you must have an annual income of at least $200,000, or $300,000 if you have a spouse. On the other hand, sophisticated investors must have at least $1,000,000 to qualify. Likewise, they must have extensive knowledge and expertise to be eligible.
