For the majority of my life, I never really knew what it meant to be an accredited investor, or that there was such thing for that matter. It wasn’t until I had been investing for many years and had accumulated quite a bit of wealth through real estate and by running a large real estate investor group that I finally learned what one was. The criteria for an individual is to have income of $200,000/year if single or $300,000/year if married or to have $1 million in net assets, not counting your primary residence. In the case of real estate assets, value would be determined by subtracting the mortgage amount from the Fair Market Value for each asset (FMV-UPB).
At first, this didn’t really strike me as an extraordinary amount of income or wealth, but less than 4% of US households ever achieve this status.
So for me, a kid who grew up as one of six children of a single mom, I now consider myself very fortunate for having achieved this status. The real benefits I see for the accredited investor is that they have more access to investments, especially with private placements and startups.
Many of these investments are only open to accredited investors because the SEC, which was set up in 1993 after the great stock market crash of 1929, was designed to protect the general public from shady investments. Its logic was that a high net worth individual was sophisticated enough to know what a good investment was and had enough income or assets and wherewithal to be okay if an investment went south; whereas the average guy or gal may become destitute if they put all their money into an investment that somehow crashed.
The irony here is that the little guy may be missing out on some of the best or highest yielding investment opportunities that are only open to the wealthy, such as note funds, hard money funds and funds set up for commercial real estate.
How to Become an Accredited Investor
There are two ways to become an accredited investor. One is by being a high income earner. This could be a highly educated person working in corporate America who rose through the ranks in his company; it could also be a self-made entrepreneur who has her own business; or maybe it’s a doctor or other type of private practitioner who has achieved this status.
The other way to become accredited is the way that I did, by acquiring assets, such as cash flowing real estate. By buying distressed properties and improving them, I created equity by utilizing leverage from institutional and private money. The cool part here is that it doesn’t really matter how much money you make. In fact, I first became a millionaire over time, while I was probably only making around $30,000 a year at my day job.
Cash Flowing Assets vs. Earned Income
There’s an old saying that it doesn’t really matter what you make, it’s what you keep. I’m living proof of that. Everyone’s biggest expense is taxes, for example, and there’s no greater tax advantage than that offered by owning real estate (e.g. depreciation, mortgage interest deductions, 1031 exchanges, etc.).
Now, I’m not saying that there’s anything wrong with having a lot of earned income, especially if you’re following your passion and you’re doing what you’re good at. But as Dr. David Phelps of Dallas, TX teaches at his Freedom Founders Mastermind Group (for doctors and private practitioners), be sure to convert as much of that earned income into cash flowing assets as possible, so that one day you can step away from your business or practice.
So, why all of this talk about accredited investors on a RE blog site like BiggerPockets?
- You can be aware of what it is and how you can get there.
- You can have the hope and promise of achieving the status and becoming eligible to invest in insider deals and specialized startups.
- You too can raise capital for your real estate deals.
Now, number three could be the most important reason. If you’re like I was years ago, I thought you needed money to do real estate deals. I wasn’t really aware that assumption was false. You just need other people’s money (OPM).
You may be limited by the amount of capital you have, but if you pair up your expertise with an accredited investor’s capital, you may be able to do more deals, deploy larger sums of capital, and spread out exposure to risk.
So, if you aren’t accredited, how do you plan to become accredited one day? Have you thought about working with accredited investors by utilizing a private placement?
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