How To Tell Whether You’re An Accredited Investor
A gold plated name card, a guaranteed table at the most exclusive restaurants in town, first-class plane tickets anywhere in the world…
I was asked, "are you accredited?" I answered confidently, yes, I think, actually - I don't know. What is accredited?"
Even though I didn't know what the guy was talking about, it sounded like a good thing? It sounded official. I thought to myself. "I hope I am."
One of the reasons being an accredited investor became increasingly important to me was that I realized that many of the passive commercial real estate investment opportunities I wanted to get involved in were open to accredited investors only. I wanted to be in the club.
There are some that will take non-accredited, sophisticated investors (i.e., investors who know a thing or two about real estate investing), but accredited investors have the golden ticket, so to speak, and really have the pick of the litter in getting into these deals.
As it turns out, there’s no formal process for applying for the title of accredited investor, and no certificate to frame for your wall. In fact, you don’t have to apply at all. Determining whether you’re an accredited investor is more or less a self diagnosis, based on a few simple criteria.
What is an accredited investor?
Okay, so what is an accredited investor? Quite simply, it’s someone who meets one of these criteria:
1. Over the last 2 years, you have had an annual income of $200,000 (or $300,000 for joint income), and you expect to earn the same or higher income this year.
2. Your net worth, not counting your primary home, is over $1 million.
Bob is a single dude. He has been working in the corporate world for 10 years. He recently has been learning about real estate, though he hasn’t invested in anything yet. He just got a raise 2 months ago and now makes $200,000 per year. His primary home is worth $1.5 million. He has $700,000 in his 401K and $350,000 in his savings account and a few small brokerage accounts. He also has $100,000 left in student loans.
Is Bob an accredited investor?
Even though Bob 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 $200,000, so he doesn’t qualify on the income criteria.
Bob's net worth is the sum total of his assets, minus his liabilities (amounts owed), and excluding his primary home. I know, ouch. That primary home takes a big chunk off the table.
This comes out to $700,000 + $350,000 – $100,000, or $950,000, which is below the $1 million threshold.
Bob is a non-accredited, though sophisticated, investor. Don't fret Bob, there are still plenty of investment opportunities out there for you.
Sonny & Sharon
Sharon is a physician. She earns $285,000 per year. Her husband Sonny is a stay-at-home dad, so he earns no income (Sonny has it good). They’ve been investing in real estate for a few years. On top of their primary home, valued at $800,000, they also have a single family rental, which they purchased for $500,000. They owe $200,000 on that rental. They have $250,000 in savings accounts. They have retirement accounts totaling $600,000 and recently received $250,000 in inheritance.
Are Sonny & Sharon accredited investors?
On the income criteria, Sonny & Sharon don’t qualify either, as they would need to make $300,000 as a couple.
On the net worth front, excluding their primary residence, their net worth is $500,000 – $200,000 + $250,000 + $600,000 + $250,000, or $1.4 million, which is above the $1 million threshold.
Because they meet one of the two criteria, Sonny & Sharon are accredited investors. Sweet.
What does being an accredited investor get you?
A gold plated name card, a guaranteed table at the most exclusive restaurants in town, first class plane tickets anywhere in the world…
Nope. You do get the pride of knowing that you are, in the eyes of the SEC, smart enough with your financials that they don’t have to worry too much about you.
For crowdfunded investments that are publicly advertised, such as through RealtyMogul, CrowdStreet, or RealtyShares, you will need to be an accredited investor in order to invest in the vast majority, if not all, of their offerings.
However, if you’re a non-accredited investor who happens to love real estate and are interested in investing in commercial real estate like apartment buildings that can make a difference in communities and the environment, have no fear. All hope is not lost.
There are investment opportunities out there for you, and often the returns are just as good as those that are exclusively for accredited investors.
However, investment opportunities for non-accredited investors can be harder to find, as none of them can be publicly advertised, due to SEC regulations.