Can You Syndicate a Single Family Home or a Duplex?
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Yes, you can legally syndicate a single family home or a duplex. Securities law cares about how you raise money, not what you buy: if passive investors put money into a deal you run, their interests are securities whether the property has 2 units or 200, so the same Regulation D rules, Form D and state notices apply. The trouble is the math. A syndication's fixed costs, the limits on 1 to 4 unit loans and the thin cash flow of one house usually leave little for investors, which is why most sponsors syndicate buildings with 5 or more units.
This post walks through the legal answer, the costs and the alternatives. It is general information, not legal advice.
Why does a syndication of a house still count as a securities offering?
A syndication sells passive interests: investors put in money and expect profit from the sponsor's work. Under the Howey test that is an investment contract, a security. Nothing in the rules exempts small properties. So a house syndication still needs an exemption such as Rule 506(b) or 506(c), a Form D within 15 days of the first sale, state notice filings and full disclosure. See what Regulation D is and Rule 506(b) versus 506(c).
How do the fixed costs compare to the equity?
Most syndication costs do not shrink with the property: forming the LLC, the offering and operating documents, the Form D, the state notices, escrow, investor onboarding, a partnership tax return and K-1s every year. On a $300,000 duplex with 25% down, the equity raised might be about $90,000 with closing costs and reserves. A few thousand dollars of setup and a yearly tax return already take a large bite of that, before any sponsor fees. On a $3,000,000 building the same costs are a small share of the raise. See what it costs to syndicate and syndication fees.
What loan problems come up with 1 to 4 units?
Homes and duplexes are usually financed with residential loans. Many conventional loans expect individual borrowers, cap how many financed properties a person can hold, and may let the lender call the loan if the title moves to an LLC with new owners. Owner occupied loans such as FHA require the buyer to live there, which rules out a passive investor group. A DSCR loan to an LLC is often possible, at a higher rate. Buildings with 5 or more units use commercial or agency multifamily loans made to an LLC and sized on the property's income, which fit a syndication. See FHA and VA loans on apartment buildings and DSCR loans.
Does the cash flow support investors?
One house has one rent. A vacancy or a new roof can wipe out a year of cash flow, and there are no other units to cover it. Split that thin cash flow across a preferred return, a sponsor share and reserves, and investors may see little. A 5+ unit building spreads vacancy across units and supports a professional manager. See small multifamily (5 to 20 units) versus large syndications.
What are the better options?
- A joint venture with one or two partners. If every partner takes an active role in decisions, the interests may not be securities. Each partner must truly take part. See joint venture versus syndication.
- Buy the house in your own LLC with a DSCR loan, and build the track record you will show investors later.
- Move up to 5 or more units. The fixed costs of a raise make more sense, and lenders size loans on the building's income. See how many units for a first syndication.
How DoorRaise fits in
DoorRaise is built for apartment buildings with 5 or more units, raised from a sponsor's friends and followers under Rule 506(b) or 506(c). Sponsors pay a $1,500 setup fee (non-refundable) and a flat $5,000 a year administration fee, and investors fund by wire into the deal's escrow account at Enterprise Bank & Trust. For a house or duplex, those fees are a large share of the raise, which is one more reason to start with a 5+ unit building. See pricing.
FAQ
Is it illegal to syndicate a house?
No. It is a securities offering like any other and needs an exemption, a Form D and state notices.
Can I raise money from friends for a duplex without it being a security?
If they are true active partners who share in decisions, it may be a joint venture rather than a security. If they are passive, it is a security.
What is the smallest building worth syndicating?
There is no legal minimum. The costs usually make sense from about 5 units, depending on price and market.
Can a syndication buy several houses?
Yes, a deal can own a portfolio of houses. The fixed costs then spread across more equity, though management is more spread out.
Sources
- SEC: Framework for "investment contract" analysis
- SEC: Rule 506 of Regulation D
- Fannie Mae Selling Guide: eligible borrowers
- Freddie Mac: multifamily loans
This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.