How to invest in real estate syndications without being accredited
New investors are excited to get into passive real estate investing deals, and if they are not accredited investor, one of the first things they are asking are: “How can I get started without meeting that criteria?” There are some creative ways in which you can approach this, but first, let’s go through what criteria makes an individual accredited:
- $1 million net worth as an individual or jointly (not including the equity in your primary home)
- An annual income of $200,000 or more ($300,000 joint income) over the previous two years, with the intention of earning at least that this year
- or personally having professional knowledge, experience, or certifications.
These restrictions were put in place by the SEC to guarantee that people investing in unregistered securities are financially capable of doing so. Being an accredited investor, on the other hand, isn’t the only method to reap the rewards of multifamily real estate investing.
Not accredited, start here
If you are not accredited you can start with tools like Fundrise, Crowdstreet, or Yieldstreet. Be sure to look closely at the terms and research who is putting the deals together. But these tools are a great option to get into larger multifamily syndications deals when you are not accredited.
You can also start with some residential approaches that allow you to build up your net worth and get some cash flow, let’s talk about those.
Start with residential multifamily
Investigate smaller homes like duplexes, triplexes, or fourplexes as another way to get involved in multifamily. Many investors like to start with the popular brrrr method as a way to speed up their cash flow and get to accredited status. Multifamily houses are frequently more lucrative because they create greater monthly rental revenue, have reduced maintenance expenses, and can be less risky. Imagine having 1 rental without a tenant, that is a big bill to cover! If you have a duplex, triplex, or fourplex, if one of those addresses is without a tenant, you have others that can be rented out to still help cover the mortgage.
This is one of several techniques new multifamily investors may use to break into the industry, and once they have enough experience or assets to qualify, they can become accredited and engage in passive income options such as syndication transactions.
Location, Analysis, and Running the Numbers
- Location – The first step is to decide where you want to invest your capital. In an ideal location, there will be a lot of room for expansion, high demand, and other well-maintained assets. Investors frequently start their search in their own local communities. Investing in nearby homes helps investors to have better access to their properties for upkeep and other needs. As their portfolio expands, they may wish to enlist the help of a team to handle projects. One of my favorite books was one by David Greene on how to Invest in out-of-state properties.
- Deal Analysis – After deciding on a location, it’s critical to weigh the advantages and disadvantages of possible investment properties. Many investors profit from the numerous advantages of living in one apartment while they rent the others out. This is a popular approach called house hacking! Something I wish I had focused on before I was married and had children. Check it out:
An investor will more likely qualify for a bigger mortgage if they live in one unit, and their personal living expenses will be paid, at least in part, by the tenant’s rent. This arrangement also has tax advantages. An owner will be able to deduct various expenditures related to maintenance and depreciation, in addition to regular homeowner deductions. Selling an owner-occupied multi-family property can sometimes result in capital gains tax exemptions.
- Comps (Comparables) – These are recently sold properties in the region that are similar to a home you’re thinking about buying or selling. Buyers, sellers, real estate brokers, and appraisers all utilize comparables to determine the worth of a house.
When looking at comparables, it’s vital to distinguish between value and price. The value of a house is determined by how much it is worth to potential purchasers in the present market, whereas the price is determined by how much it is actually listed for. A buyer’s objective is to find a property with a price that is comparable to its worth, and comps can help.
- Calculate Income & NOI – It is good to start with similar rentals in the neighborhood when determining a property’s prospective revenue. Online marketplaces such as Zillow may help you find out what other landlords are charging so you can stay competitive while increasing your profits.
You then need to determine your net operating income (NOI) for the year after you determine your rental revenue. The net operating income (NOI) is calculated by deducting yearly property expenditures from annual rental income. Take the gross income and deduct all expenses to determine cash flow (vacancy factor, mortgage, taxes, insurance, repairs, and costs).
- Cap Rates – Cap rates, also known as capitalization rates, are a method of estimating and comparing the rates of return on different commercial real estate investments. The cap rate is computed by dividing the property’s net operating income (NOI) by the asset value of the property.
Cap rates may provide you a lot of information about a property. However, the cap rate isn’t the only statistic used to assess the risk of an investment. Factors that can impact your cap rate are the location, market size, asset stability, potential growth, and capital liquidity (basically how much money you put in, which can impact your NOI).
Once you complete your due diligence and close your first deal you have a few options! You can leverage the equity in your property (especially after brrrr and house hacking as we mentioned) and get more properties. You could focus on paying down the mortgage with rental income (which uses less leverage and debt) or even take a stab at Airbnb’s which has been VERY hot over the last few years but also has risks of its own that we are not covering today.
I hope this was helpful! To learn more about investing in multifamily and to get access to future deals we are doing at Growth Vue, contact us and talk to our investor relations team.
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