Investing is all about risk and reward. Whether it’s a mutual fund or a piece of raw land, an investor risks a certain amount of money in anticipation that he’ll generate a positive return. However, there’s always the risk that he could lose money, too. In order to protect investors from facing undue risk, the United States Securities and Exchange Commission (SEC) has certain restrictions in place. As a real estate investor, understanding how these restrictions do or don’t impact you could be paramount to your success. More specifically, it’s helpful to familiarize yourself with what it means to be an accredited investor.
What is an Accredited Investor?
Most investments are required by law to be registered with the SEC before they can be offered for sale to individual investors. There is, however, one major exception to this rule. If the investment is being sold to an accredited investor, it doesn’t have to be registered.
Accredited investors, unlike the majority of the general public, are legally qualified to invest in hedge funds, venture capital funds, private equity deals, and various real estate transactions without restriction. This provides more opportunities, but also increases risk if something goes wrong.
Individuals, banks, corporations, nonprofits, partnerships, and trusts can all become accredited investors (granted they satisfy the legal requirements).
The Requirements for Becoming an Accredited Investor
According to the SEC, an accredited investor includes anyone who:
For other groups – such as banks or trusts – the following requirements are in place:
For individuals, it’s pretty easy to determine if you’ve earned more than $200,000 in each of the previous two years. Net worth, on the other hand, isn’t always as clear.
As mentioned, your primary residence doesn’t count toward your net worth. (This also means the mortgage associated with the property doesn’t count as debt.) Thus in order to calculate your net worth by the SEC’s standards, you’ll want to take a sheet of paper and draw a line down the middle. On the left side of the page, write down all assets other than your home (this includes bank balances, investments, and other real estate investments). On the right side of the page, list off all debt (including car debt, student loans, credit card debt, other real estate loans, etc.). Subtract your total debt from your total assets and this is your net worth.
If your net worth exceeds $1 million, you’re an accredited investor. You don’t need to fill out an application or go through a process of obtaining an official designation. You’re simply an accredited investor by default.
It’s also worth noting that your status as an accredited investor can change from year-to-year – either as a result of your own financial situation, or changes to the SEC’s definition of what it means to be accredited.
For example, prior to the Dodd-Frank reforms, an investor’s primary residence was permitted to be used in net-worth calculations. And as financial regulations continue to be rolled back under the current administration, it’s possible that we could revert back to the original calculation in the near future. Make sure you stay abreast of any changes in your own personal financial situation, as well as larger financial trends.
Tips for Success as an Accredited Investor
As an accredited investor, there are virtually no limits on what kinds of real estate deals you can participate in. In addition to investing properties directly and actively managing them yourself, you can also invest passively via syndication or crowdfunding. This lets you invest in much larger properties and more asset classes. It also gives you the opportunity to enjoy more geographic diversification and lower borrowing costs.
In regards to passive investments, one of the biggest perks of being accredited is that it gives you access to passive real estate opportunities that earn similar returns to actively managed investments. In other words, you get similar returns with less of a time commitment. There are two trade-offs, though. First off, you must be willing to let someone else manage and control these investments. Secondly, there’s always the risk that you could lose your investment as a result of not being in-tune with what’s happening in the investment.
The key to successful real estate investing as an accredited investor is to avoid flaunting your status. Broadcasting your title will only make you a target for people who want your money. Start small and use your status as an accredited investor to build trust when you run across an attractive deal.
At the end of the day, the SEC is willing to call you an accredited investor because you appear to be smarter and more successful than the average individual. They’re expecting you to use discretion and do due diligence before investing. Failing to do so could hurt you in the long run.
Work With Estate Investing
At Estate Investing, we are direct real estate investors and active property wholesalers. By purchasing at the right price, we’re able to wholesale real estate to our active list of buyers and pass along tremendous, below-market deals that provide a hefty ROI for all parties involved. To gain access to these deals, please join our investor list today!