How To Become An Accredited Investor And Why It Matters

how to become an accredited investor

How To Become An Accredited Investor

Each week, I’m enjoying having conversations with other doctors & high-income earners about passive real estate investing, specifically syndications.

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You maybe asking yourself, “What’s a syndication?

A syndication is nothing more than a group of people pooling their money together to buy something such as an apartment complex or commercial building. The majority of these deals are for accredited investors only which seems to confuse people.

When I invested in my first deal, I had no idea what it meant to be “accredited” either.  So today I want to explain what an accredited investor is and why it’s so important to become one.

Who Is an Accredited Investor?

The Securities and Exchange Commission (SEC) defines what an accredited investor is via Rule 501 of Regulation D of the Securities Act of 1933.

It states that an accredited investor is:

  • A person with an annual income of at least $200,000 in each of the two most recent years or $300,000 for a married couple. 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.

Research shows that 8.25% of all American households – or roughly 10,000,000 households – count as Accredited Investors.

Why Was The “Accredited Investor” Category Created?

Whenever I’m explaining real estate syndications to someone, one of their questions involve why these types of investments have to be for accredited investors.

The short answer, “to protect investors.”

The way I explain it to them is this:

If someone making $200,000 a year invests $50,000 in a deal and it goes south, it’s not the end of the world for them. Yes, it would hurt to lose that money but due to their great income, it wouldn’t set them back too much.

If on the other hand someone making much less each year were to lose that amount of money, it could bankrupt them.

So the purpose of making a particular deal for accredited investors only is to act as a protective measure to keep them from getting in over their heads into something that could cause them financial ruin.

Example

Here’s a real world example of what it means to be an accredited investor. Since we’ve been talking about syndications, let’s use that as the example.

A syndicator or sponsor is the person or group of people that locates property (such as an apartment) and puts the deal together. They then make sure that the property is managed correctly, keep it occupied, market it, maintain it, etc.

In the U.S., these deals are regulated especially since money is being raised. The syndicator has to follow certain SEC guidelines to make sure everything is done “by the book.”

Now there are a couple options for how syndicators set up their deals and these will determine what kind of investors are brought in, accredited or non-accredited.

For example, take a 506(c) fund. In these investments, the syndicator can broadly solicit and generally advertise an offering, provided that they are ONLY to accredited investors.

So if you’re an accredited investor, you can get into some pretty awesome deals that the rest of the population can’t.

Accredited investors find themselves in a financial class above the average investor. While the average investor only has access to opportunities limited within the regulated public markets, accredited investors are eligible to invest in private offerings such as:

  • syndications
  • early stage business startups
  • other investments with the potential for high returns but high risk
  • Hedge funds
  • Venture capital funds
  • Private equity deals
  • Equity crowdfunding
  • Angel investing

Here’s what the guys over at Bigger Pockets have to say:

Who Certifies Accredited Investors?

I recently spoke with a dentist that practices in North Carolina. Once we determined that she met the accredited investor criteria, she asked, “Is there someone that is supposed to certify me?”

One component to the SEC’s rules on accredited investors is that it doesn’t require a government agency to issue certifications.

Instead, the responsibility is on the investment issuer to qualify its investors.

All of the real estate deals I’m in had me self-certify that I met the accredited investor criteria but also that I understand the implications behind it.

Occasionally, some syndicators will request verification from a CPA or may ask to produce your tax returns.

Summary

To review how to become an accredited investor you must be:

  • A person with an annual income of at least $200,000 in each of the two most recent years or $300,000 for a married couple. 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 you can see, being in the accredited investor category opens up doors to potentially better paying investments than you’d otherwise have access to.

Are you an accredited investor that's interested in learning more about passively investing in real estate?
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