506b vs. 506c: A Simple Guide for Multifamily Investors
What is Multifamily Real Estate Investing?
Before we explore the distinctions between 506b and 506c, let's define multifamily real estate investing or syndication. Think of it like a group project in real estate. When you join a multifamily syndication, you're teaming up with others to buy an apartment building or something similar. A pro who knows the ropes (the syndicator) leads the team and handles all the things you don't want to deal with, like finding tenants and fixing things.
The good news is that you get to share in the profits if the building does well. Plus, you're spreading your risk because you're not putting all your eggs in one basket. But remember, it's like investing your money in a big project: things can go up or down, and you might not be able to get your money back right away.
Depending on your financial situation, there are different ways to invest in these real estate investments. If you are an Accredited Investor, any investment that has the distinction of 506c is available. If you are not, there are opportunities for you also which are limited and they are referred to as 506b. Read on for more.
Raising Capital with 506b and 506c
When it comes to raising funds for multifamily investments, you'll encounter terms like 506b and 506c, which refer to different methods of capital raising under the SEC’s Regulation D.
506b is akin to borrowing money from friends and family. In this method, you can only approach individuals you already know. There's no requirement for them to be wealthy or seasoned investors. It’s a more personal approach to raising funds.
Key Features of 506b:
Restricted to Known Investors: You can only raise funds from individuals with whom you have an existing relationship.
No Public Advertising: You cannot publicly advertise your investment opportunity.
Investor Limit: Typically, you can have up to 35 non-accredited investors.
On the other hand, 506c is like placing an open advertisement seeking funds. You can solicit investments from anyone, but they must meet the criteria of accredited investors, which generally means they need to have a significant level of wealth. This approach allows for larger investments and is particularly appealing to high-net-worth individuals.
Key Features of 506c:
Open to Accredited Investors: You can solicit investments from any individual who meets the accredited investor criteria.
Public Advertising Allowed: You can promote your investment opportunity publicly.
No Investor Limit: There’s no cap on the number of investors you can have.
In Summary:
506b: You can only ask people you know and have a personal relationship with.
506c: You can reach out to anyone, provided they are accredited investors.
To illustrate, think of 506b as borrowing from a friend or neighbor, while 506c is like approaching a bank for a loan.
Understanding these differences can help you choose the right approach for raising capital for your multifamily real estate investments.
