What Is An Accredited Investor And Do I Need To Be One
Updated: Apr 30, 2020
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 crowdfund 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 a sophisticated investor and an accredited investor and which one you are.
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.
To be an accredited investor, you must:
As a single or married person, 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. OR
Have a net worth of over $1 million (individually or together with your spouse), including real estate equity, but not counting your primary home.
It May Help To Run Through Examples
Meet Carl & Jenna
Carl is a nurse anesthetist and earns $210,000 per year. Carl has earned $210,000 for the past 2 years and expects to earn this much next year and going forward. Jenna is a stay-at-home mom, so she earns no income. Their primary home is valued at $400,000. They have $150,000 in savings, plus $600,000 in retirement and a $100,000 cash value in their Whole life insurance policy. Are Carl & Jenna Accredited Investors?
Based on income, Carl qualifies to be an accredited investor, but they do not qualify when investing jointly since their combined income is below $300,000.
Excluding their primary residence, their net worth is… $150,000 (in savings) + $600,000 (retirement) + $100,000 (Cash Value Life Insurance) = $850,000 which is below the $1 million threshold. Because Carl meets one of the two criteria, he is accredited.
Meet Barbara & Louis
Barbara works as Software Engineer and makes $170,000, her husband Louis owns a business making $140,000 per year. They own a house that wass worth $450,000 when they purchased it and it has since appreciated to $600,000. They have $400,000 in equity. They have a rental property worth $200,000 with $50,000 in equity, They have $50,000 in savings, $200,000 in retirement, and $75,000 in a CD.
Are Barbara and Louis Accredited?
Barbara & Louis make a combined income of $310,000 and have done so for the past 2 years and have reasonable expectation that they will make the same next year, so they are accredited by income because they make a joint income of greater than $300,000.
They have a networth of $375,000. $50,000 in equity in their rental home (We can’t include the equity in their primary residence), + $50,000 savings, $200,000 retirement, and $75,000 in a CD for a total of $375,000.
They would not qualify if it were based on net worth alone.
Meet Anthony
Anthony has had a corporate career for 10 years and is single. He just got a raise 2 months ago and now makes $200,000 per year. Anthony’s primary home is worth $500,000. He has 400,000 in his 401K and $350,000 between his savings and a few brokerage accounts. He owes $100,000 to student loans.
Is Anthony an Accredited Investor?
Even though Anthony currently makes $200,000 and has reason to believe he will continue making that amount or more in the coming year, his annual income over the past two years has been below the $200,000 criteria.
Anthony’s net worth is: $400,000 (401K) + $350,000 (savings and brokerage accounts) – $100,000 (student loans) = $650,000, Since his net worth is under the $1 million requirement, Anthony is a non-accredited investor.
Meet Zoey & Evan
Zoey is a physician and earns $285,000 per year. Evan 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. They have $250,000 in savings, plus $600,000 in retirement. Evan recently received $250,000 in inheritance.
Are Zoey & Evan Accredited Investors?
Based on income alone, they do not qualify jointly, since their joint income is below $300,000. However, Zoey & Evan are accredited investors excluding their primary residence because their net worth is $1.4 Million.
$500,000 (single family rental) – $200,000 (balance owed on single family rental) + $250,000 (savings) + $600,000 (retirement) + $250,000 (inheritance) = $1.4 million, which is above the $1 million threshold.
Because they meet one of the two criteria, Zoey and Evan are accredited investors. Woohoo!
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 wealth. The last thing the SEC wants is for someone to invest their last dime or to have their world turned upside down if they were to experience a loss. Thus, more investment opportunities are open to accredited investors, since they 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 with companies like Vidente Capital.
However, since SEC regulations do not allow investments for non-accredited investors to be publicly advertised, you may have to search harder to find them.
Not sure if you are accredited? Want to learn more about investment opportunities open to you? Sign up for the Vidente Capital Investment Club to learn more about passive investing and to hear about these opportunities when they become available. www.videntecapital.com #multifamilyrealestatesyndications #passiveincome #videntecapital #realestatesyndications #makemoneywhileyousleep #multifamilysyndications #passiveinvesting #investingmadesimple