By Joe Firmin 4-minute read
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 crowdfunded 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 if you’re one of them.
Neither of these titles requires a credit check, application or lengthy approval process. Whew! You can find out whether you’re an accredited investor based on a few simple criteria.
What to Look For
To be an accredited investor, you must:
- 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, not counting your primary home.
It May Help to Run Through Examples
Meet Penny
Penny has had a corporate career for 10 years and is single. She just got a raise 2 months ago and now makes $200,000 per year. Penny’s primary home is worth $1.5 million. She has $700,000 in her 401K and $350,000 between her savings and a few brokerage accounts. She owes $100,000 to student loans.
Is Penny an Accredited Investor?
Even though Penny currently makes $200,000 and has reason to believe she will continue making that amount or more in the coming year, her annual income over the past two years has been below the $200,000 criteria.
Penny’s net worth is: $700,000 (401K) + $350,000 (savings and brokerage accounts) – $100,000 (student loans) = $950,000,
Since her net worth is just under the $1 million requirement, Penny is a non-accredited investor.
Sarah & Josh
Sarah is a physician and earns $285,000 per year. Josh 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 on it. They have $250,000 in savings, plus $600,000 in retirement. Josh recently received $250,000 in inheritance.
Are Sarah & Josh Accredited Investors?
Based on income alone, they do not qualify, since their joint income is below $300,000.
However, excluding their primary residence, their net worth is…
$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, Sarah and Josh are accredited investors. Yup.
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 some wealth. Thus, more investment opportunities are open to you, since you are in a better position to take on risk and understand how to manage the 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. However, since SEC regulations do not allow investments for non-accredited investors to be publicly advertised, a sponsor of one of these types of investments will need to present you with such an opportunity.
Even if you are not an accredited investor, you’re in luck. There are passive income solutions that work for you if you are what’s called a “sophisticated investor.”
Sophisticated? Sounds uppity… Don’t worry. The SEC gives some guidance here to say that you “must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment."
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