What Does It Mean to be an Accredited Investor?
Once you decide to dive into the real estate investing world, it won’t be long before you hear the term “Accredited Investor.” Once you notice how many passive commercial real estate or crowd funded investment opportunities are publicly advertised and therefore limited to accredited investors, you may get curious.
Even if you’re a total newbie, it’s important to know the difference between sophisticated investor and an accredited investor and if you’re one of them.
Neither of these titles requires an application or an approval process. You can find out whether you’re an accredited investor based on a few simple criteria.
What to Look For
To be an accredited investor, you must:
1. Have had an annual income of $200,000 (or $300,000 for joint income) for the past two years, and expect to earn the same or higher income this year.
2. Have a net worth of over $1 million, not counting your primary home.
It May Help to Run Through Examples
Tiffany has had a corporate career for 10 years and is single. She just got a raise 2 months ago and now makes $200,000 per year. Tiffany’s primary home is worth $1.5 million. She has $700,000 in her 401K and $350,000 between her savings and a few brokerage accounts. She owes $100,000 to student loans.
Is Tiffany an Accredited Investor?
Even though Tiffany currently makes $200,000 and has reason to believe she will continue making that amount or more in the coming year, her annual income over the past two years has been below the $200,000 criteria.
Tiffany’s net worth is: $700,000 (401K) + $350,000 (savings and brokerage accounts) – $100,000 (student loans) = $950,000.
Since her net worth is just under the $1 million requirement, Tiffany is a non-accredited investor.
Samantha and Ben
Samantha is a physician and earns $285,000 per year. Ben is a stay-at-home dad, so he earns no income. Their primary home is valued at $800,000. They bought a single-family rental home for $500,000 and have a $200,000 balance on it. They have $250,000 in savings, plus $600,000 in retirement. Ben recently received $250,000 in inheritance.
What Are the Perks?
The main perk of being an accredited investor is access to more deals. Why is this? Well, in the eyes of the SEC, being an accredited investor means that you are savvy enough to have figured out how to accumulate some wealth. Thus, more investment opportunities are open to you, since you are in a better position to take on risk.
If you’re a non-accredited investor who happens to love real estate, there are still plenty of investment opportunities available, including passive investments through real estate syndications. However, since SEC regulations do not allow investments for non-accredited investors to be publicly advertised, you may just have to search harder to find them.