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SHOW NOTES FOR EPISODE 292: ACCREDITED INVESTORS, FREE LAND IN THE U.S. & INVESTING WITH $10,000
This is our monthly Fun Fact Friday “Ask Bill!” episode, where I answer specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
One of our goals here at the Old Dawg’s REI Network is to help to educate/enlighten fellow real estate investors, to share what little knowledge we have by answering your questions, and to help other investors to broaden their understanding of real estate investing and to, hopefully, avoid some of the mistakes that can cost you later.
In this month’s “Ask Bill!” episode, Bill answers questions on passive investing in syndications as an Accredited Investors vs. Sophisticated Investors, where you can find free land in the U.S. and what’s the best way to get started in real estate investing if you only have $10,000.
Question #1 – Accredited Investor Status
Hi Bill
I just listened to your podcast on the difference between Debt and Equity Investments. The part about building a relationship prior is a necessity for non-accredited investors…
FYI, I talked to my accountant and they said they didn’t provide any kind of accredited investor. The due diligence was on the operator of the investment to gather the necessary paperwork.
Answer to Question #1
Hey Dan,
How are you? Great hearing from you again!
Good questions! Yes, you are right. Investments for sophisticated investors do require a prior relationship. You are, because of our previous conversation, considered someone who has a prior relationship.
Let me elaborate:
There are 2 main types of real estate syndication investing categories:
- 506 (b)
- 506 (c)
To answer your question, I contacted my Syndication Attorney, Kim Lisa Taylor at SyndicationAttorneys.com. Her website has a great explanation for you. Here is what is says…
Often, in social forum discussions concerning offerings under Rules 506(b) and 506(c) you only find good partial explanations. Here are the complete rules:
506(b) allows you to raise an unlimited amount of money from an unlimited number of Accredited Investors and up to 35 Sophisticated Investors. Investors can self-certify by attesting that they meet the definitions. However, you cannot use any means of general advertising or solicitation to promote the offering. To prove this, you must be able to demonstrate that you have a substantive, pre-existing relationship with every investor before you make any of them an offer to invest. The pre-existing relationship has been further defined as knowing whether the investor is Sophisticated or Accredited before you make the offer. That means you must have already had a conversation about the investor’s finances and his or her business, finance, or investing experience to know if that person is Sophisticated or meets the qualifications as an Accredited Investor (for individuals: $1 million net worth or $200,000 income if single; $300,000 income if married).
506(c) allows you to raise an unlimited amount of money from an unlimited number of verified Accredited Investors. You can freely advertise your offering to everyone (including on a crowdfunding platform), but you must be reasonably assured that all investors are Accredited before accepting their funds. The SEC has suggested that someone with a license (CPA, Registered Investment Advisor, Attorney, Broker-Dealer, etc.) or you can review the investor’s financial records (within 90 days of the investment) to determine if that person is Accredited and provide you with a certification letter. The investor must provide further assurance that he or she is accredited, which is usually done through a Subscription Agreement where the individual certifies that he or she meets the definition of an Accredited Investor.
Sometimes, you can use outside services that verify that a person is an Accredited Investor: Companies like EarlyIQ.com.
If you have any other questions, just let me know.
Thanks.
Bill
Question #2 – Is there still land in the USA that is unclaimed?
Answer to Question #2
Yes, there is still lots of land in the U.S. you can get for free!
For example, in Lincoln, Kansas, you get get a free plot of land in a subdivision that is all set up with power, utilities and a 10-year property tax rebate program. Not bad for free!!
I did a whole podcast on this very subject (http://olddawgsreinetwork.com/098-16-places-where-you-can-get-free-land/) and provide 16 links (in my show notes) to places where you can obtain free properties. Now, granted, there are requirements (must live on the land or open a business on the land) but, nonetheless, the land is still FREE!
I hope that answers your question!
Question #3 – What is the best way to start investing in real estate with only a small ($10,000 or so) amount of money in my early 20’s?
Answer to Question #3
$10,000 is plenty of money to get started investing in real estate. In fact, if you are wise, you should try to use as little of the $10,000 as possible. Part of the beauty of real estate investing is that you can use leverage, even from the very beginning.
You can start more creative by using OPM (other people’s money) such as partners, family members, other investors, banks and even sellers. A lot of people balk at the whole “no money down” approach but it is possible and people do it all the time. It is more difficult and requires more knowledge and effort but it is possible and it can make your funds last longer.
Or, you can use the $10,000 to purchase a very inexpensive home (that’s possible, too, but the home will likely need some serious work) or you could use it as a 25% down payment on a home that costs say $50,000 (of course you would need a few thousand more for closing costs). I personally bought a duplex in Indianapolis in 2015 for a little more than $50,000. It has two tenants who pay me $650 each per month for a total monthly rental income of $1,300 per month. I was also very blessed to have bought in an “up and coming” area called Bates Hendrix. Today, the home is worth around $200,000. I can now do a cash-out re-fi and take out some of my equity to buy one or two more duplexes and do the same thing all over again.
You see, you can do a lot with $10,000 if you are willing to be creative and invest in the right areas.
If you are interested in learning more about real estate investing and how I plan to acquire 1,000 units by 2020, I have a podcast episode from my show that outlines the main steps to becoming a real estate investor. To listen, click here: 006: How to Get Started in Real Estate Investing
Don’t worry, I’m not selling anything. Everything I present is free!
Well That’s all for today!
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