If you have looked at real estate investments, or if you’ve seen information about investments online, you’ve probably noticed the term “Accredited Investor” or “506c” in an advertisement for the investment. While these terms are very common, if you’re new to looking at real estate, you may not know what this means. Or, maybe you’re not new, but you may be looking for a bit more clarity on what defines an accredited investor?
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Whatever your reason, if you’re interested in knowing more, keep reading and I’ll explain it in a way that’s hopefully easy to understand.
The title of “accredited investor” does not require an application or an official approval process by any specific agency. You can find out whether you are an accredited investor based on a few simple criteria that you can look up yourself. However, before investing in a syndication that requires accredited investors, you do need to be officially verified through the investment sponsor.
To qualify as an accredited investor, you must:
1. Have had an annual income of $200,000 (or $300,000 for joint income) for the past two years, and expect to earn the same or higher income this year.
2. Have a net worth of over $1 million, not counting your primary home.
While these definitions are fairly straightforward, it may also help to look at a few examples just to help use a situation that might be more relatable to explain the differences.
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Michael has had a corporate career for 10 years and is single. He just got a raise 2 months ago and now makes $200,000 per year. Michael’s primary home is worth $1.5 million. He has $700,000 in his 401k and $350,000 between his savings and a few brokerage accounts. He owes $100,000 to student loans.
Even though he currently makes $200,000, and has reason to believe he will continue
making that amount or more in the coming year, his annual income over the past two years has been below the $200,000 criteria. So, his income doesn’t qualify him as an accredited investor.
However, what if we look at Michael’s net worth? We have to ignore the value of his personal residence. If he has $700,000 in his 401K plus $350,000 between his savings and brokerage accounts – $100,000 from his student loan debt, that equals a net worth of $950,000. So, again Michael does not qualify as an accredited investor.
To review, since his income is at/above $200,000, but only just recently, he cannot qualify based on the income requirement. Also, his net worth is just under the $1 million requirement. Therefore, Michael does not qualify as an accredited investor. However, even though he is not an accredited investor, Michael can still invest in real estate syndications that are set up as 506b offerings which allow non-accredited investors.
Elizabeth is a physician and earns $285,000 per year. Steven is a stay-at-home dad, so he earns no income. Their primary home is valued at $800,000. They bought a single-family rental home for $500,000 and have a $200,000 balance on it. They have $250,000 in savings, plus $600,000 in retirement. Steven recently received $250,000 in inheritance.
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Based on income alone, they do not qualify, since their joint income is below $300,000.
However, we can also check to see if they qualify based on their net worth. Since we have the exclude their primary residence, we need to do their net worth calculation without it.
$500,000 for the single family rental – $200,000 still owed on the rental + $250,000 in savings + $600,000 in retirement accounts + $250,000 from their recent inheritance = $1.4 million, which is above the $1 million threshold.
Because they meet one of the two criteria, Elizabeth and Steven are accredited investors.
The main advantage of being an accredited investor is access to more deals. Why is this? The Security and Exchange Commission, SEC, regulates real estate syndications and based on the way the SEC looks it at, being an accredited investor means that you are financially savvy enough, and have enough financial knowledge and cushion, to have figured out how to accumulate some wealth.
Thus, more investment opportunities are open to you, since you are assumed to be in a better position to understand the investment and to take on risk. Accredited investors can invest in both 506c and 506b offerings, so they have more investment choices.
If you are a non-accredited investor, like Michael, who happens to love real estate, there is no need to be disappointed. There are still plenty of investment opportunities available, including passive investments through real estate syndications. The difference is you are limited to investments in 506b offerings only.
Since SEC regulations do not allow investments for non-accredited investors to be publicly advertised, you may just have to search harder to find them or find some General Partnership teams that offer 506b investments. There are many out there, including Progress Capital Group.
The returns offered on 506b or 506c investments are generally similar. So, even if you’re a non-accredited investor, you may not have as many options on which investments to choose, but you’ll still have investments with great returns to choose from.
At Progress Capital Group, we offer both 506b and 506c investments, so both accredited investors and non-accredited investors have an opportunity to invest in great real estate deals with great returns.
One big difference for non-accredited investors who want to invest in a 506b investment is that you need to have a pre-existing relationship with the General Partnership (sponsor) team. If you’re interested in learning more about investing and establishing a relationship, you can schedule a call here.If you’re interested in learning more about real estate, check out more articles on my website at www.progresscapitalgroup.com/blog. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.
First, let’s start off with defining what is Net Operating Income (NOI)? This is a term you will see in property information documents for every real estate syndication. So, if it’s in every one, it must be important, right? It is. Net Operating Income is a calculation that shows the profitability of an income-generating real estate investment. NOI is determined by taking all revenue from the property (both rent and non-rent revenue) and subtracting all reasonably necessary operating expenses.
NOI is calculated as a before-tax figure which appears on a property’s income and cash flow statement. The calculation excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. The similar calculation in other industries, it is referred to as “EBIT,” which stands for “earnings before interest and taxes.”
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Now that we’ve defined what NOI is, why does it matter? There are lots of calculations and metrics that show up on a property information package or investment sheet. Why is NOI one of the metrics that matters most?
NOI is so important because it is one of the key metrics that is used to determine the value of a property. When NOI is divided by the capitalization rate (cap rate), the resulting number is the value of the property. NOI can also be used to determine the current cap rate of a property which can be compared to the prevailing cap rate for a given area. Knowing the current cap rate can tell you whether a building is undervalued or overvalued.
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When written as an equation, NOI is calculated as follows:
NOI / Cap Rate = Property Value
As an example with some sample numbers:
If the NOI for a property is $40,000 and the cap rate is 5%, what’s the value of the building?
$40,000/0.05 = $800,000
Thus, the NOI has a direct impact on determining the value of an apartment building. It also has a direct impact on increasing the value of an apartment building. Since the “NOI” term in in the numerator, an increase in the NOI means an increase in the value of the property.
If a sponsor team can increase the NOI of the example above by just 10%, meaning they add only $4,000 per year to the NOI by increasing the income, decreasing the expenses or a combination of both, the resulting value of the building rises by $80,000 ($4,000/0.05 = $80,000). That’s an $80,000 increase in value of the building with just a $4,000 increase in NOI for this example. Now you can see why NOI matters so much and how powerful of a metric this is. What if the increase in NOI was even more?
When you hear people talk about value-add apartments, NOI is the main metric the sponsor team is trying to increase on any value-add property. A value-add investment is a property where there is value that can be added to the property which will increase the NOI, and thus, the value of the building so the investment can be sold for a higher price than what it was purchased for.
In a separate article, I talk about some strategies on how to increase NOI for a property.
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Net operating income (NOI) is a commonly used figure to assess the profitability of a property. The calculation involves subtracting all operating expenses on the property from all the revenue generated from the property. The higher the revenues and the smaller the expenses, the more profitable a property is. This tells the owner if the income generated from owning and maintaining the property is worth the cost. It’s also the major metric that sponsors are trying to increase in order to increase the value of a property.
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If you’re interested in learning more about real estate, check out more of my education articles on my website at www.progresscapitalgroup.com/blog. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.If you’re interested in investing, you can schedule a call.
5 Reasons to Invest in Passive Real Estate Investments
There are many things you can invest your money into. Stocks, bonds, cryptocurrency, real estate among other things. Each of these options has a different level of return and risk associated with the investment.
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Most people are invested in stocks, bonds and mutual funds through their own brokerage accounts or through their 401(k) or IRA retirement accounts. While these can be good options, and they certainly are the most talked about in the mainstream media, they certainly are not the only options, and may not be the best option on a risk-adjusted basis.
My preference is to invest in real estate and there are many ways to invest in real estate. You can buy your own rental properties, invest in a REIT, or act as a lender to loan money to other folks for them to use invest in real estate with an agreed return for your loan. For this article, I’m going to focus on investing in real estate passively through real estate syndications.
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Syndications are when a sponsor, the person(s) who find and manage the investment, get multiple investors to pool their money to buy a large property. The sponsor is also referred to as the General Partner (GP) and the investors are referred to as Limited Partners (LP’s). Investing in a syndication as a limited partner (LP) is a truly passive investment in real estate which means after you invest your money, you do not need to participate in any management of the property.
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Investing in real estate is an excellent option as an alternative to investing in stocks, bonds or mutual funds. Why? Real estate syndications can offer a great return with very little effort, especially when considered on a risk-adjusted basis as real estate can be very low risk by comparison to stocks. This is especially true if you invest in a property that has an experienced sponsor as part of the GP team.
So, what are the major benefits of investing in a passive real estate syndication? There are five key ways you can benefit from these types of real estate investments:
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One of the greatest benefits of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining money after property expenses are paid is distributed to the investors as cash flow.
Not all real estate syndications pay cash flow, and some that do pay will pay quarterly rather than monthly. However, if you put $50,000 into a syndication that has an 8% cash on cash return, that means the investment would pay $333 per month ($50,000 * 8%/12 months/yr = $333/month). Since you invested in a syndication, the cashflow comes to you totally passively, which is the best kind of cash flow I can think of.
Leverage is what allows investors to pool only 25% of the money to buy a property, rather than the full 100%. The reason only 25% is required is that the bank (lender) will put up the remaining 75%, but the bank only charges the mortgage payments and doesn’t expect any of the investment returns from the property while the property is owned or upon the sale. All of the investment returns are distributed between the GP team and LP investors.
Without leverage, so much more money would be need to be raised for each property. This would both make raising money and buying properties much more difficult, but it would also dilute the percentage of ownership and, thus the returns, for each investor.
Equity is basically the difference between the value of the property and the debt owed on the property. So, if the property value is $5,000,000 and the debt owed is $3,000,000, the equity is $2,000,000, or 40% in this case.
As the mortgage is paid down, and the value of the property appreciates with the improvements being executed by the management team, the equity in the property increases. Equity is what is captured at the sale of the property as part of the total gain. It also allows for the property to be refinanced as the value is increased. A refinance can be done to return some, or all, of the LP investor’s initial capital while still allowing the investors to own the asset and benefit from the cashflow and continued appreciation.
This is a beautiful thing as the returned capital can be re-invested into another property while still owning the original one. Thus, now owning two properties for the price of one.
Appreciation is a major element of determining the total return from an investment. It is a big component of determining the IRR of an investment. IRR is used across the investing industry to offer a sort of comparison between different investments.
Appreciation is the difference between the purchase price of the property and the price of the property when it’s sold (or the current value of the property if it’s not yet sold). The key aspect to a value-add property is to drive up appreciation by increasing the value of a property through raising revenue (rent, fees, etc.) and lowering expenses. Thus, increasing the net operating income for the property which increases the value and the appreciation.
When you invest in a real estate syndication, you the investor get your portion of the benefits of depreciation, mortgage interest deductions, as well as a whole host of write-offs for several other related expenses.
Real estate investors often show losses on paper, while actually making money through cash flow. These paper losses can help to offset other income, which is another aspect as to why real estate can be so lucrative.
Moreover, when investing in commercial real estate syndications, you can take advantage of cost segregation and accelerated depreciation, which further increasing the tax benefits that you realize.
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Advantages of Investing in Real Estate
Through investing in real estate syndications, you can take advantage of cash flow, leverage, equity, appreciation, and tax benefits. These aspects of investing are the 5 key reasons why investing in real estate has so many advantages.
If you’re interested in learning more about real estate, check out more of my education articles on my website at www.progresscapitalgroup.com/education. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.
If you’re interested in investing, you can schedule a call.
There are many ways to measure the return of an investment. Cash on cash return, average annual return, IRR, yield, among others. One common way to measure the projected return of a real estate syndication investment is through a metric known as “Equity Multiple”.
Equity Multiple (EM) is generally expressed as a “[number]x”, like 1.8x or 2.0x. The number is essentially an expression of the multiplier you can apply to the initial capital investment in a syndication to understand your projected return at the end of the hold period of the investment. Since investment performance is not precisely known at the start of a syndication, you’ll often see an Equity Multiple expressed as a range, like EM = 1.9x to 2.1x.
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To use some actual numbers, since that’s generally how I learn best, if you invest $100,000 into a real estate syndication with a projected hold period of 5 years and the projected Equity Multiple is 2.0x, then the projected amount you would receive at the end of the hold period is $200,000. This is because your initial investment of $100,000 (initial capital) times a 2.0 Equity Multiple is $200,000.
However, this does not mean you’re getting a total return of $200,000 PLUS the initial investment of $100,000. Equity Multiple is a projection of how much total you would receive at the end of the hold period. In this example, your initial capital of $100,000 is returned to you along with an additional $100,000 from the performance of the investment. In this example, you doubled your money by investing in a syndication that had a projected Equity Multiple of 2.0x.
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This is a bit more of a straightforward way of understanding a projected return as it is a bit simpler to do the math in your head versus trying to figure out what the return would be for a specific IRR across a 5-year hold period.
While it’s not the only metric you should review when you’re looking at an investment offering, Equity Multiple is a great metric to help with quickly understanding the projected return on an investment.
If you’re interested in learning more about real estate, check out more articles on my website at www.progresscapitalgroup.com/blog. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.
If you’re interested in investing, you can schedule a call here.