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When you graduate into becoming a Capitalist, where your money works for you, there may be a point where you become classified as an Accredited Investor.
There are strict criteria you have to meet before you can claim yourself as a member of this desirable club.
You can qualify as an accredited investor in one of two ways:
Salary of $200k or more for an individual or $300k/ for a couple for the past TWO years
Reasonable expectation that this income will continue to be the same or increase.
Net Worth Based:
An individual or couple with a net worth of $1 million or more (primary home value excluded from this valuation).
Why make this designation in the first place?
The SEC (Securities Exchange Commission) made the designation of Accredited investor so that there might be a layer of protection afforded to non-accredited investors regarding unregistered securities (such as those common in private syndicated deals).
The reasoning behind this decision was that an accredited or “sophisticated” investor can invest in these deals and be able to withstand a complete loss should the investment go south.
A non-accredited potential investor on the other hand, with limited income/assets, would have a more devastating hit to his or her finances if such a loss occurred.
What is the benefit to the syndicator?
A syndication is essentially a collective group of investors who pool their money to buy a large investment which would be unlikely for an individual to be able to buy on his or her own.
A syndicator trying to raise capital for an investment can avoid expensive regulatory filings with the SEC if their investor base is solely made of accredited investors.
The syndicating company can raise an unlimited amount of money if its entire investor bases is accredited
- This is different to crowdfunding stipulation where startups are only allowed to raise a maximum of one million dollars in a 12 month period if they have non-accredited investors involved.
I’ve become an accredited investor, Xrayvsn. Now what?
First off congratulations.
It is an achievement you really should be proud of.
Unfortunately becoming an accredited investor does not automatically get you a secret handshake or key to the secret room in back.
In fact, prior to 2013, these private placement syndicators were not even allowed to use mainstream advertising.
Therefore it is up to you, the accredited investor, to find these private syndicators, typically through word of mouth or on niche blogs/forums.
Given that the amount of money needed (typically $50k minimum for each investment), is substantial, the onus falls on the accredited investor to make sure the syndicator he or she invests with has merit, a good track record, and follows a philosophy that is suitable to an investor’s personal risk profile.
There are syndicators that specialize in all the various real estate sectors available, or even a combination of them.
Some real estate syndications specialize in one property at a time, placing them in individual LLCs to shield them from other properties in the portfolio.
As an investor you can make your own decision whether to invest or not in each potential offering.
Allows an individual the ability to select particular geographic areas that may be beneficial tax wise (purchasing properties in states like Texas would obviate the need to file a state income tax form each year.
Much like an individual stock, there is lack of diversification with a single property investment (“all eggs in one basket”).
If something unexpected should happen to a particular property it can drastically affect your bottom line.
Then there are other real estate syndications that take multiple properties and place them into a single fund that an investor can invest in.
Much like a mutual fund, there is increased diversification as the risks are spread out over multiple properties.
The investor has no say in which properties are being bought or sold in a particular fund.
Properties can be spread out over multiple states which may entail filing multiple state income tax returns.
Another issue to consider with both types is that syndications typically send out K-1 Forms for Income Tax filing fairly late, sometimes requiring filing an extension on your federal taxes.
Do you need real estate, and in particular syndicated real estate, to have a successful portfolio?
The simple answer is no.
There are many ways to build a successful portfolio that may or may not have a real estate component in it.
For those individuals who are drawn by the potential benefits of real estate (favorable tax treatment such as depreciation, 1031 exchanges), becoming an accredited investor can certainly open up many doors to investing opportunities in the real estate realm.
Whether you choose to go through a particular door will still require analysis on a case by case basis.
But first you need the key to that door, which is accreditation, and getting that will certainly be A Credit To Your Name.
In my X-ray Beam Series, Dennis Bethel, M.D. really gave a wonderful explanation of syndication in much greater detail with multiple informative links.
Dennis happens to be a principal in the syndicated company I use, 37th Parallel, who specializes in single property acquisitions of large multifamily commercial apartments
[Financial disclosure: 37th Parallel is a paid sponsor of this blog, however I have invested in them for a year prior to the launch of this blog and have had only great experiences]
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
I’ve struggled in how to take advantage of any depreciation with these syndications. Also, it is my understanding that 1031 exchanges with these platforms is rare, but a few are opening up such possibilities or using Delaware Trusts? Thanks!
Thanks for the comment and stopping by. In my case the syndicator (which happens to be 37th parallel) prepares a K-1 form which basically accounts for all the distributions you received that past year (mine are paid 1 month after a quarter ends) as well as the depreciation from various items for that investment (basically for a commercial real estate venture, the IRS allows you to depreciate the building over 39 years (i.e. does not allow land value depreciation). Stuff that will lower your tax burden (and often make it $0 tax incurred in the early stages) would be mortgage… Read more »
Thanks for the fantastic explanation of being an accredited investor & the opportunities that affords you!
I appreciate the kind words. Thanks for the support and stopping by.
I always learn something when I stop by your blog, Xrayvsn!
That just made me smile 🙂 Thanks again for the kind words. Hopefully the trend of informative blogs continues. 🙂 Appreciate the support.
I want to get into real estate syndication / crowdfunding / etc. investments. But there are so many things holding me back:
1) My lack of experience puts me at a disadvantage in terms of doing due diligence
2) I am not really looking forward to complicating my tax situation (I prefer simplicity)
3) I have seen mixed results from this form of investing. I’ve seen some comments on other physician blogs where people have had horrible experiences.
I agree DMF, it is something that carries a lot more uncertainty as it is not mainstream and because of its very nature is outside of the purview of SEC. You certainly can get to a path of immense wealth just based on savings rate and high income doctors have and putting it to work in the standard investment allocations most people do. My draw to this field is my desire to create a passive income stream that would allow me not to consume the capital (which the 4% rule of portfolio safe withdrawal rate employs). There are not too… Read more »