The Magic Number: $1 million

A million! Wow. Seems like such a big number. It’s amazing to me that a million dollars still goes a long way in our society.

When you read stories about businessmen of the 19th and early 20th centuries, such as Rockefeller or Carnegie, you get the sense that if ‘millionaire’ status is still a big deal, it must have been a really big deal back then.

$1 million is a magic number in the private money capital raising world for the following reasons:

• $1 million is the minimum net worth to be an accredited investor, by SEC definitions
• $1 million is the maximum amount of capital you can raise in a 12 month period under a Regulation D, Section 504 securities offering

It seems as though the SEC regulators as well as state securities law administrators still feel that a million is a lot of money (hey, who said they had to change fast?!)

But, what’s the big deal anyway, I mean – why are these two benchmarks of the magic million so important?

First of all…

a Reg. D 504 offering is something that you’ll probably use quite a bit as you raise private money to fund your deals. Putting together $1 million in equity capital or borrowing that much private money could be just what you need for a lot of deals that could springboard you to seven figure net worth status. Especially in this market. In many places, prices have fallen by so much that, what was once untouchable in terms of price is now reachable.

Bargains Abound for Under $1 million

For instance, “B” apartment buildings in my area used to sell for over $40,000 per unit (cap rates well south of 7%). The cash flow numbers were impossible on acquisition of these projects. The rents could not be increased fast enough the expenses couldn’t be cut enough in a short period of time and then the interest rate re-calculator clock reset and these projects could not cash flow at the prices they were purchased for. So, we have the 40 unit building that sold for $1,600,000 back in 2004-2005 now being offered for $1,000,000, and less in many cases by sellers desperate to get out with something combined with a bank happy to short sale or the project is completely bank owned.

In either case, an “all cash” purchase would get you a great deal – and it would probably be the only way you could tackle it if the project was bank owned. So, you would put the $1,000,000 in  equity capital together and then grab the deal. When you raised the money, Regulation D, 504 offering would be what you would use. Regulation D, 504 offerings are the most simple of securities offerings out there. You simply file Form D with the SEC (and perhaps your state), a form U7 with your state and then any forms your state may require. As long as you aren’t going to use general solicitations (which I don’t recommend for capital raises under $1,000,000, anyway) you should have a pretty quick and painless securities offering.

The Accredited Investor

Accredited individual investors (whom you’ll be dealing with a lot when you raise private money) are defined as those individuals who make more than $200,000 per year ($300,000 for household) and have a net worth of at least $1 million. There that $1million number is again.

Accredited investors are important in your money raising objective because the securities laws are more favorable to you getting money from them versus non-accredited. Essentially, the SEC has determined that people with higher incomes and higher net worth’s are better able to withstand financial loss and, therefore, you aren’t required to go through as many steps to offer securities to them as you are to non-accredited investors. In fact, you are often able to raise much more with less documentation from accredited investors than any other. When you can raise capital faster with less barriers, it is always beneficial for you, the real estate investor.

I can’t say for certain whether $1 million will still be seen as a lot of money in the future. The way some experts are predicting pending inflation (due to government stimulus), it may not be long before accredited investors must have a net worth of $2 million or more. In the mean time, $1 million is still a magic number to know and be aware of when your borrowing private money to fund your deals or putting equity investors together for building wealth through real estate.

Tags: Raising private money, Regulation D offering