“Hey Dr. Jeff, why have I never heard of that type of investment vehicle before?”
I frequently get this question from new Passive Investor Circle members regarding real estate syndications.
If you’re not sure what a real estate syndication is, check out this video:
The reason why that person had never heard about syndications is that the majority are only for accredited investors.
When I first began educating myself about real estate, I had no idea what the accredited investor definition meant.
For the first decade of my dental career, I only put money in investment options that I was familiar with….the stock market.
At that time, I was a big-time Dave Ramsey fan. I followed his 7 baby steps to accomplish financial peace but was still searching for more.
Related article: The 7 Dave Ramsey Baby Steps Explained
During those initial years, most of our investment portfolio consisted of Vanguard index mutual funds (i.e. VTSAX Vanguard Total Stock Market Index fund).
It wasn’t until I began seeking out asset classes that cash flowed to replace my dental income vs the 401k accumulation method that I began to understand how important being an accredited investor was.
In this article, we’ll discuss:
- where the term “accredited investor” came from
- what’s an accredited investor
- benefits of being an accredited investor
- how to qualify
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Sign up for my newsletterWhere Did The Term Accredited Investor Come From?
The concept of the “accredited investor” started with The Securities Act of 1933. The government wanted to prevent harm coming to individuals that lacked the knowledge or experience to thoroughly evaluate certain types of investments.
This act served two main purposes:
#1. To require investors access to financial and other significant information concerning the securities offerings they invested in.
#2. To prohibit misrepresentations, fraud, and deceit in security sales.
In other words, the goal of this law was to protect everyday individual investors.
You have to remember that this was created after our nation went through The Great Depression.
The Securities and Exchange Commission (SEC) adopted rule 501 of Regulation D in an effort to further standardize investor eligibility to participate in private investments and to help small businesses raise capital. This rule ultimately defined what an accredited investor is from a monetary perspective.
What Is An Accredited Investor?
Before 2020, a United States accredited investor was anyone who satisfied the following conditions either based on income or high net worth status:
- A natural person with an annual income of at least $200,000 in each of the two most recent years or married couples making $300,000 joint income. There must be a reasonable expectation of the same income level in the current year; or
- A person or married couple with a net worth of at least $1 million which does NOT include a primary residence.
As of December 9, 2020, the SEC stated that accredited investors can also be those that can demonstrate financial literacy in the world of finance. This includes (and is limited to):
- Investors with certain professional certifications, designations, and/or credentials, including Series 7, Series 65, and Series 82 licenses while qualifying as “natural persons.” (Investors with other licenses are to be considered and added in the future.)
- “Spousal equivalents,” or spouses of accredited investors who pool their assets along with said investors to meet the previous net worth and/or income requirements for accredited investors. (Eg. If you are married to an accredited investor and share monetary resources, you are now also an accredited investor.)
- Those who are “knowledgeable employees” of a private fund.
- Limited Liability Companies (LLCs) and Family Office entities with $5 Million assets under management. SEC- and a state-registered investment adviser (but not reporting advisors) of these entities can also now be considered accredited investors.
- Entities including Native American tribes, governmental bodies, funds, and entities “organized under the laws of foreign countries” with investments over $5 million — as long as they were not formed solely to invest in a specific accredited investment.
In essence, the above SEC rules aim to limit accredited investors to those that have “financial sophistication” and net worth to withstand additional risk of unregistered securities which tend to have a higher risk in nature.
3 Benefits Of Being An Accredited Investor
#1. Access to higher yield investment opportunities
Unfortunately, most doctors and other high-net-worth individuals follow the conventional “401k accumulation” route per their financial advisor.
They’ve worked hard in school, racked up tons of debt, juggle between living the “good” life and investing what’s left over each month in the stock market. That’s all we’re taught, right?
Following this path will almost assure you of having to work until you’re 65+ in order to hopefully have enough money to retire.
The problem you’ll run in to is that your options are limited. If you want to cut back or retire much earlier, then it’s extremely hard to do as you’re having to count on time and compound interest to build wealth.
There’s nothing wrong with this but one of the main advantages of being an accredited investor has to do with giving you access to investment opportunities that can shortcut your retirement.
Let me give you an example. Typically when a company raises money outside of the public capital markets, it’s typically done with something called a private placement.
Many times, these private placements offer MUCH higher yields than what you can find in the public markets (stocks, bonds, etc.).
If you qualify as an accredited investor, you’ll have access to these types of investments.
Other opportunities available to accredited investors:
- Hedge funds
- Real estate syndications
- Venture capital (or angel investing)
- Hard money loans
- Commercial real estate
#2. More diversification
In a high inflation environment, having access only to public markets limits diversification options for your portfolio.
Accredited investors are able to diversify into investments that hedge against inflation such as cash flowing real estate.
Also, in times when the stock market is declining, having access to apartments, mobile home parks and other real estate is key as it doesn’t rise and fall with the markets.
The bottom line is having a well diversified portfolio can help to mitigate risks.
#3. Higher returns
If I become a millionaire after 30 years and you become one after two years, who’s the richer person? We’re both millionaires, right? Building wealth in a shorter amount of time allows you to compound at a rapid rate. And being an accredited investor allows you to do that with access to investments that offer much greater returns versus the markets.
Traditional index funds average 7-8% a year. Many of the real estate syndication deals I’m in offer an internal rate of return of 15-20%+.
Also, you should realize that the more risk you take on, the higher your return could be.
Which is the reason I’m big on teaching others to get as much education and network with other experienced investors before investing.
Due Diligence
I graduated with 58 people in my dental school class yet would only allow 4-5 to work on me. As with anything in life, there’s always the good, the bad and the ugly.
Same goes with investments. For instance, let’s look at real estate syndications.
There are good sponsors and bad sponsors. There are good investments and bad investments. It’s up to the accredited investor to do their own due diligence to choose the best deal.
Related article: 7 Ways To Evaluate a Real Estate Sponsor
When I first started investing in real estate, I quickly learned how challenging it was being a solo investor. It’s for this reason I started a group for accredited investors only (Passive Investors Circle) in order to share educational content to help them make the best investment decisions.
How To Qualify As An Accredited Investor
Typically, the individual companies offering unregistered securities are the ones that perform verification processes to confirm that an investor is accredited.
Usually, they’ll have you answer questions about this during the application process for proof that you qualify as an accredited investor.
The documentation you could need includes W-2s, tax returns, and investment or retirement account statements.
Other ways to qualify would be a letter from your CPA or websites such as Verify Investor.
Final Thoughts
As an accredited investor, you’ll have access to many alternative investments that look promising. Once you sign up on a few email lists, it won’t take long to be inundated with deal flow.
Don’t let the fancy brochures touting high returns fool you. Yes, it can all be exciting at first but don’t do what I did….jumped in before I knew what I was doing.
Early on, I lost a considerable amount of money with crowdfunding investments (I don’t invest in these now). Once you reach accredited investor status, spend time educating yourself first on whatever asset classes interest you.
Make it a point to network with others and read (alot). Once you find the team (sponsors) that you trust, then you can begin moving forward with more confidence.
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