What's an Accredited Investor and Why should I be one?
by Christopher Levarek
“To improve is to change; to be perfect is to have changed often.”
- Winston Churchill
If you’ve spent some time in real estate forums or circles, you will have heard the term “Accredited Investor”. You might have also been presented a few opportunities in commercial real estate that state a requirement to be an accredited investor and wondered just what that means.
I was the same way when I first started hearing this term thrown around and questioned just what the heck was accredited and why should I be one?
Really this term is simply a classification of an investor which gives a stamp of approval, according to the SEC, that this type of investor can be involved on certain opportunities. Think of it like a safeguard in protecting the investor.
In general, investors are classified as either sophisticated or accredited in real estate investments.
How to know
To qualify as an accredited investor, you must fulfill these requirements :
You must have a net worth of over $1 million, not counting your primary residence (home)
OR
You must have had an annual income of $200,000 or $300,000 if joint income for the past two years with the expectation to earn the same or higher in the present year.
OR
You must hold a General Securities Representative (Series 7), Private Securities Offerings Representative (Series 82), or Licensed Investment Adviser Representative (Series 65) registration in good standing.
So Why does it Matter?
The number one reason to qualify as an accredited investor is the greater availability to many more deals or investments. In general, any real estate investment opportunity limited to accredited investors can be advertised publicly. Meaning, you are more likely to see this investment and thus have more choices of investment types.
In other non-accredited opportunities, the investment must be discussed behind closed doors or with an existing established relationship with the deal provider. This can sometimes limit the visibility to you the investor on a variety of these investments unless you have that relationship with the deal provider.
There are many other investment opportunities in these scenarios as well however since they are not advertised publicly, these simply require more diligence to find them.
Let’s look at some Qualifying or Non-Qualifying example Investors :
Meet Jason
Jason is an IT engineer for over 15 years and filing taxes as a single individual. He makes $150,000 annually and his primary home is worth $500,000. He also has $750,000 in his 401k and $225,000 in savings. He has no other debt to speak of as he paid his car off in cash at purchase two years ago.
Does Jason qualify as an Accredited Investor?
Since he makes $150,000 annually, already he does not qualify for the first requirement as an accredited investor of $200k income.
Jason’s net worth is $750,000 (401k) + $225,000 (savings) = $975,000.
Just missed it! As you can see, Jason is $25,000 short of satisfying the second requirement of net worth of $1 million. Jason is a non-accredited investor.
William and Marion
William is a captain pilot for Delta Airlines and makes $173,000 annually after ten years of flying. Marion works as Nurse for a nearby hospital making around $68,000. They live together in their home which they own valued at around $600,000.
Living fairly below their means has allowed them to purchase two rental properties nearby each valued at $500,000 and to which they owe 380,000 mortgages on.
They make around $60,000 in rental income from the properties per year. They only have $15,000 in savings as they spent most of their savings purchasing the rentals.
Do William and Marion qualify as Accredited Investors?
Based on their net worth, we find that the rentals $500,000 (rental 1) - $380,000 (mortage 1) + $500,000 (rental 2) - $380,000 (mortage 2) + $15,000 (savings) = $255,000 in net worth. So they do not satisfy this requirement.
Based on their income, we find that $173,000 (William) + $68,000 (Marion) + $60,000 (Rentals) = $301,000!
William & Marion meet the joint income requirement of plus $300,000 and are thus accredited investors.
In Final
Understanding if you are an accredited investor can open the doors to many new opportunties that are more easily accessible. However, a non-accredited investor also has other investment opportunities if they join the right circles or make the right connections.
In either case, we invite you to learn more by joining the Valkere Investor Club and have a call with a member of one of our team to build a plan for your investment goals.