a handshake while raising capital for real estate

Raising Capital for Real Estate Using a 506(b) Structure

You’re eager to take your real estate investing efforts to the next level this year, but you need money to make that happen. The problem is, you’re not completely sure how to go about raising capital for real estate.

If you’re wondering how to raise money from investors, now may be the ideal time to consider using a 506(b) real estate syndication structure.

What You Need to Know About Real Estate Investing and Securities

If you raise money from private investors to purchase an investment property, your investment is a security if it meets the following criteria. First, the investment must involve money. In addition, you should expect to generate profits from your investment. Third, money is being invested in a single common enterprise. Finally, the profit generated stems from a third party’s efforts.

Simply put, any time you’re raising capital for real estate from investors and you make decisions for both you and them, you have created a security.

If you have a security on your hands, you are legally required to register it with the United States Securities and Exchange Commission. Unfortunately, registering your public offering can become an expensive and prolonged process. However, you may be able to avoid the registration process if you qualify for a registration exemption.

That’s where a 506(b) real estate syndication structure comes in.

The 506(b) Exemption

Rule 506(b) refers to Rule 506 of Regulation D. This is an SEC exemption that allows you to avoid registering your security if you offer it exclusively to countless accredited investors and 35 or fewer non-accredited investors, or sophisticated investors.

Note that an accredited investor is a couple or individual whose net worth totals a million dollars, excluding his or her primary residence. This type of investor should have earned more than $200,000 per year for the past two years and should expect to do the same this year. In addition, a couple who has earned $300,000 together for the past two years are considered accredited investors.

When raising capital for real estate, you can raise as much money as you want from accredited investors without having to register your offering. In addition, your accredited investors may come from all states. Note that sophisticated investors, or non-accredited investors, are simply people who report having superior knowledge about financial and business matters.

Excel in Real Estate Investing This Year

I successfully raised more than $1 million from private investors to complete my first multi-family real estate deal—a unique feat. Now, I can help you to also successfully raise money for your real estate deals through my Best Ever podcast and educational blogs.

Alternatively, check out my newest book, the Best Ever Apartment Syndication Book to discover actionable advice for raising capital for real estate.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless