Are you an Accredited Investor?
Have you ever heard of the term accredited investor? If you’ve only ever invested in stocks and mutual funds then maybe not. But if you’ve ever wondered who gets to invest in hedge funds or ever tried to invest in a real estate syndication then maybe you have. Becoming an accredited investor opens up the SEC guarded castle gates to a whole world of investments that the average joe doesn’t even know about. Let’s talk about what qualifies you to be an accredited investor, the investments that are available to you, and what you can do if you aren’t accredited
Accredited Investor. In simple terms, you meet certain net worth and income requirements we’ll mention shortly. If you meet these requirements the Securities and Exchange Commission (or SEC) is assuming you’re an experienced investor who knows what you’re doing and you can afford to lose a significant chunk of money. So, the SEC will allow you to invest in private securities that are (supposedly) higher risk without the safety net of protections that exist in public securities.
So what are the current requirements to be an accredited investor?
You need an earned income that exceeds $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR have a net worth over $1 million, either alone or together with a spouse excluding the value of your primary residence.
There are also other categories of accredited investors. Any trust, with total assets in excess of $5 million which is directed by a sophisticated person. Or, a group comprised of only accredited investors.
So what can you invest in with your accreditation status? Things like Angel Investors, Venture Capital, Private Equity Funds (like real estate syndications), Hedge Funds, Specialty Investment Funds, and I’m sure many more. All of these investments aren’t available to the general public and generally offer a higher return than what the average joe can get. You can access these investments through investment advisors and websites specializing in offering investments only to accredited investors. But some real estate investments requiring accredited investors can be found with an easy google search.
If you meet the requirements of an accredited investor, great! But you’ll have to prove your accredited investor status to those offering investments only to accredited investors. You can do this a few ways. You can get a letter from your investment advisor, broker-dealer, lawyer, or CPA stating that you’re accredited. If you meet the income requirements, you can provide your tax statements or pay stubs and a statement that says you expect to maintain that income for the year. Or, you can provide a statement of your assets and liabilities along with a credit report. There are also some websites that specialize in verifying your accredited status. A quick google search will reveal those websites.
There are only about 700,000 people in the US who qualify as accredited. That’s only point 2 percent of the population! So what opportunities do unaccredited investors have specifically in real estate? Well, you can buy your own real estate without restriction. You can also actively partner with another investor in a property. But the key word there was actively. You have to be part of the day-to-day operations for that property and not be a limited or passive partner. You can also get in on some crowdfunding platforms that allow you to invest small dollar amounts, like 50 dollars, on individual investments. There are a few of those platforms out there but that’s another episode. There are some real estate syndications you can participate in as well. But that will be the subject for part two of this series!
If you don’t meet the income requirements for an accredited investor then you may be wondering if you meet the net worth requirements. So let’s talk about how to calculate your net worth. It’s as simple as adding together what you own, like your stock portfolio, muscle car collection, and investment property. Then subtracting your liabilities, or your debt, from your assets. If you have 500,000 thousand in stocks, 500,000 thousand in muscle cars, and a 250,000 thousand dollar rental home then you have 1.25 million in assets. But You owe 200,00 thousand on the cars, and 200,000 thousand on the rental house, and are still paying off 150,000 in student loans then you net worth is 700,000 thousand. Remember, you can’t count your primary residence in this calculation for the purposes of the SEC.
Also, the SEC proposed some changes to who qualifies as an accredited investor during a conference in December of 2019. The wealth and income levels stated previously will remain in place. But spouses of accredited investors, anyone who’s passed the Series 7, 65, or 82 tests, and knowledgeable employees of private funds will qualify. Also, entitles like LLCs, family offices, investments advisors and their clients, and Indian tribes who have at least 5 million in investments will qualify. Since the government moves at the pace of a snail stuck in molasses I wouldn’t expect to see these changes anytime soon.