Accredited investors (sometimes called qualified investors) have access to investments that aren’t available to the general public. These investments could be hedge funds, hard money loans, convertible investments, or any other security that isn’t registered with the financial authorities.
In this article, we’re going to focus specifically on real estate investment options for accredited investors. We’ll show you:
- What it means to be accredited,
- How to become an accredited investor,
- Why accreditation is necessary, and
- The best real estate investments for accredited investors.
This is everything you need to know about real estate investing for accredited investors.
What Is an Accredited Investor?
An accredited investor is an individual or business who meets the SEC’s (Security and Exchange Commission's)qualification requirements to invest in unregulated securities.
While anyone can invest in well-regulated securities like stocks, bonds, treasury notes, mutual funds, etc., the SEC is concerned about average investors getting into investments beyond their means or understanding. So, rather than allowing anyone to invest in anything, the SEC created an accredited investor standard. If individuals (or business entities) meet specific income or wealth requirements, they can access investment options that are unregulated.
In very general terms, unregulated securities are believed to have higher risks and higher rewards than regulated investment vehicles.
SEC Regulations for Accredited Investors
It’s important to remember that SEC regulations for accredited investors are designed to protect investors. Unregulated securities can provide exceptional returns, but they also have the potential to create losses. Without oversight from financial regulators, the SEC simply can’t evaluate the risk and reward of these investments, so they can’t provide information to educate the average investor.
So, the SEC created a system of qualifying investors based on income or wealth. The idea is that investors who earn enough income or have enough wealth are able to absorb the risk better than investors with lower income or less wealth.
As an accredited investor, you are expected to complete your own due diligence before adding any asset to your investment portfolio.
Income and Net Worth Requirements for Accredited Investors
As long as you meet one of the following four requirements, you qualify as an accredited investor:
- You have earned $200,000 or more in gross income as an individual, each year, for the past two years. And you expect this level of income to continue.
- You and your spouse have had a combined gross income of $300,000 or more, each year, for the past two years. And you expect this level of income to continue.
- You have a net worth of $1 million or more, excluding the value of your primary residence. This means that all your assets minus all your debts (excluding the home you live in) total over $1 million.
- Your business entity has at least $5 million in assets. Or all equity owners in the business qualify as accredited investors.
Why Do I Need to be Accredited?
Being an accredited investor opens doors to investment opportunities that you can’t access otherwise. Once you’re accredited, you have the option to invest in unregulated securities, which includes some outstanding investment opportunities in the real estate market.
What If I Don’t Qualify as an Accredited Investor?
There is a wide range of real estate investing strategies available to investors who don’t currently meet the SEC’s requirements for accreditation. You can always start investing through a more traditional method, then advance to investment opportunities for accredited investors once you have built enough wealth to meet the requirement.
How To Become an Accredited Investor
Becoming an accredited investor is simply a matter of proving that you meet the SEC’s requirements.
To confirm your income, you can provide documentation like:
- Income tax returns for the past two years,
- Pay stubs for the past two years, or
- W2s for the past two years.
To confirm your net worth, you can provide your account statements for all your assets and liabilities, including:
- Savings and checking accounts,
- Investment accounts,
- Outstanding loans,
- And real estate holdings.
To confirm that your business qualifies as an accredited investor, you can provide:
- Proof of the value of your company’s assets, or
- Verification letters to confirm that each equity owner is accredited.
Where Can I Get Accredited?
You can have your attorney or CPA draft a verification letter, confirming that they have reviewed your financials and that you meet the requirements for an accredited investor.
But it may be more cost-effective to use a service specifically designed to verify accredited investor statuses, such as EarlyIQ or VerifyInvestor.com. You might even be able to get verified for free through an accredited investor platform. For example, if you sign up with the real estate investment firm, Gatsby Investment, your accredited investor application will be processed through VerifyInvestor.com at no cost to you.
Difference Between Angel Investors, Sophisticated Investors, and Accredited Investors
The terms angel investors, sophisticated investors, and accredited investors are often used interchangeably, but there are subtle differences.
Angel investors provide seed money for startups and small businesses in exchange for ownership equity in the business. Angels are typically accredited, though there are some complex loopholes in Title III and Title IV of the JOBS Act that allow non-accredited angels to make limited investments.
Sophisticated investor is a general term used to describe anyone with specialized skill, knowledge, or experience in the financial sector. In most cases, sophisticated investors are also accredited investors because they have used their unique qualifications to earn enough money to meet the SEC’s financial requirements for accreditation.
Accredited investor is the umbrella term for anyone who meets the SEC’s income or wealth requirements. They can be angel investors, but they don’t have to be. Generally, anyone who is accredited is assumed to be a sophisticated investor. Individuals and business entities who maintain high incomes or sizeable wealth are presumed to have reasonable knowledge of finance, qualifying as sophisticated.
Can International Investors be Accredited?
Yes, international investors can become accredited by American financial standards. The income/net worth requirements remain the same for foreign investors. But it’s important to note that incomes and asset values must be converted to US Dollars during the verification process.
The Best Real Estate Investment Options for Accredited Investors
Here are the best investment opportunities for accredited investors in real estate.
Real Estate Crowdfunding
Real estate crowdfunding is when investors pool their funds to purchase or renovate a property, then share in the proceeds.
Crowdfunding has become one of the most popular methods of investing in real estate online since the JOBS Act of 2012 allowed crowdfunding platforms to offer shares of real estate projects to the general public.
The main benefits of crowdfunding are:
- Comparatively low minimum investments,
- The ability to leverage capital from multiple investors to acquire a property you couldn’t afford on your own,
- And having a sponsor to oversee the project on your behalf.
Some crowdfunded real estate investments don’t require accreditation, but the projects with the greatest potential rewards are typically reserved for accredited investors.
The difference between projects that accept non-accredited investors and those that only accept accredited investors typically comes down to the minimum investment amount. The SEC currently limits non-accredited investors, who make less than $107,000 per year) to $2,200 (or 5% of your annual income or net worth, whichever is less, if that amount is more than $2,200) of investment capital per year. Projects that require more per investor are generally made available only to accredited investors.
Real Estate Syndication
Real estate syndication is one of the best ways to invest in real estate. It is very similar to real estate crowdfunding; the process is essentially the same, and it comes with all the same benefits as crowdfunding.
The only major difference is the ownership structure. Real estate syndication offers a stable LLC or Statutory Trust ownership model, with all investors serving as members of the entity that owns the underlying real estate, and a syndicate who facilitates the project.
With syndication, investors always own an equity stake in the underlying real estate, which is a step up from general crowdfunding, in which investors might only own a share of the debt that’s financing the property.
REITs (Real Estate Investment Trusts)
A REIT is a company that invests in income-generating real estate and shares the rental income from the properties with investors in the form of dividends.
REITs can be publicly traded, in which case they are regulated and available to non-accredited investors. Or they can be private, in which case you would need to be accredited to invest.
Private REITs have higher investment minimums (typically $25,000 or more), but by purchasing such a large stake in a REIT, you’re increasing your equity, which will likely correspond to higher dividends from higher rental incomes.
It’s important to note that REITs typically come with several fees.
- Management fees for a private REIT can be 1-2% of your total equity each year
- Acquisition fees for new purchases can come to 1-2% of the purchase price.
- Administrative fees can total .1-.2% each year.
- And you may have performance-based fees of 20-30% of the private fund's profits.
Private Equity Real Estate
Private equity real estate investments work similarly to REITs. But, while REITs focus on tenant-occupied properties with stable rental income, private equity real estate firms focus on real estate development. These firms often develop a plot of raw land into an income-generating property like an apartment complex or retail shopping center.
As with private REITs, investors in private equity ventures generally need to be accredited.
Real Estate Investing for Accredited Investors with Gatsby Investment
One of the best investment opportunities for accredited investors is real estate syndication. And Gatsby Investments makes it easy for accredited investors to build a real estate portfolio that provides cash flow potential, long-term appreciation, and tax benefits.
With our innovative investment platform, you can choose from a wide range of investment options in the real estate market. And with our reasonable investment minimums, you can even spread your capital among multiple projects to create a diversified real estate portfolio instantly!
Choose from several convenient investor options with Gatsby Investment. You can invest as an individual, a company, or an international investor. You can even invest through your retirement account!
You just need to be verified as an accredited investor to unlock the many benefits of working with Gatsby Investment. And we can help with your accredited investor verification process. Once you sign up for a free account with Gatsby, we’ll direct you to the accredited investor application through VerifyInvestor.com. And we’ll cover your application fee.
Enjoy the freedom, flexibility, and high reward potential of being an accredited investor by joining Gatsby Investment today!