Accredited Investors: What qualifies you? Does it matter?
If you’re considering entering the world of real estate investing, you may have heard the term “accredited investors” being tossed around. While there is a lot of information about accredited investors, how to become one and the benefits of being recognized as one floating around, there is also a significant amount of misinformation. No, you don’t have to be an accredited investor to start making money as a real estate investor. However, there are several benefits to establishing yourself as an accredited investor when you’re looking to work with other investors to make bigger deals. Understanding what accredited means in the world of real estate investing and the benefits of being accredited is an important part of developing your real estate investing business plan.
What is an Accredited Investor?
The United States Security and Exchange Commission, or SEC defines the term accredited investor under Regulation D. According to their definition, an accredited investor is a person or business entity who is legally allowed to trade securities that are not registered with any sort of financial authorities. There are certain criteria that must be met in order to be recognized by the SEC as an accredited investor.
The reason for the differentiation between accredited and unaccredited investors is the financial risk associated with exchanging unregulated securities. The SEC designates certain people or business entities as accredited, giving them the legal right to exchange these unregulated securities because they have established their financial proficiency. Companies often choose not to register their securities with the SEC because it saves them money in the fees associated with registering. In order for them to sell their securities, they have to work with an accredited investor.
How to Become an Accredited Investor
While you do not have to meet all the requirements to become an accredited investor, the SEC does require that you meet at least one of them. This criterion establishes that you have the financial proficiency needed to make wise investments or the financial assets on hand to support yourself if the investment doesn’t pan out.
The first thing the SEC will consider is your personal income. To be recognized as an accredited investor, you must have a personal income exceeding $200,000 (or $300,000 joint income) for the last two years. You will also have to provide reasonable proof that you expect to earn at least the same amount in the current year. You can also reach accredited investor status if you have a net worth, either jointly or individually exceeding $1 million (not including your primary residence).
An entity or corporation can be recognized as an accredited investor if it is a private business development or organization with assets that exceed $5 million. Also, if this entity is owned by accredited investors, the entity is automatically considered accredited as well.
Benefits of Becoming an Accredited Investor
While you do take on significantly more risk by investing in unregistered securities, there are also several benefits of becoming an accredited investor. First of all, it gives you access to more potential investments. If you are an unaccredited investor and there are 5 potential secured investments you’re looking into, none of them may seem like a sound investment for you. In contrast, if you are an accredited investor, you can choose between those five investments and five other investments that are unregistered securities. Having more options is always a great thing for investors who don’t want to be limited in their choices.
Additionally, these options give you the ability to diversity your investment portfolio. Investors understand how important it is to have a diversified portfolio to protect themselves against a downturn in one area of the market. Being accredited ensures that you can choose between any number of investments and better protect yourself going forward.
Accredited Investors and Real Estate Syndicates
Real estate syndication laid the groundwork for what has become real estate crowdfunding. However, one of the key differences is the fact that real estate syndicates are often choosier about who they allow in as investors. In many cases, real estate syndicates only allow accredited investors into the syndication because those investors are considered to be more proficient in the world of real estate investing and have access to more capital that can be used in future investments.
Additionally, depending on the type of investment that the syndicate is making, accredited investors may be the only ones allowed into the syndication. Since accredited investors have the legal ability to invest in non-secured exchanges, a syndicate that is looking into these ungoverned securities has to be made up of accredited investors. Essentially, no real estate syndicate is going to turn away an accredited investor who wants to be a part of their group. However, some syndications may be unwilling or unable to include non-accredited investors. Becoming an accredited investor means that you have your choice of real estate syndicates to invest in.
You can certainly establish yourself as an investor without being accredited. However, it’s generally a good goal to strive for. As an accredited investor, you not only have access to more options, but it also carries a certain amount of influence in the investment world. Once you reach the income levels that must be met in order to be recognized as an accredited investor, you should certainly consider contacting the SEC to receive recognition as an accredited investor.