accredited investor process

26 Replies

How does one become an "accredited multi family investor" and what criteria is used to measure this?

I am currently in the education phase of my journey, but also realize that I may be in a position to invest into larger MF deals. Lastly, I understand for out of state multifamily loans, Fannie will only look at you if you have 2+ years of out of state experience - if I was able to involve myself into some larger out of state MF deals through this route, in the eyes of Fannie would this experience check that box?


Accredited investor is a definition determined by the SEC. But basically the part that is likely relevant to you is measured either by income or net worth. 

For income, you have to have income of more than $200k for the previous 2 years with the likelihood of you achieving the same in the upcoming year. This requirement can be $300k for a couple, which is good if you barely miss out at $175k for example but your spouse makes $125k, so you qualify together. 

For net worth, you have to have a net worth of $1M excluding your primary residence. Your net worth is your cash, retirement funds, business assets, other assets, etc, minus all your debt.

You need to be an accredited investor in order to be eligible to invest in certain private placements that are not directly overseen or monitored by the SEC. Some of these private placements are multi-family investments, but there are all kinds extending way beyond real estate. The reasoning is that by the time you meet the qualifications, you will have the financial sophistication to do your own due diligence and will be able to risk capital into a largely unregulated investment. There is no formal process for getting accredited that I know of, though ... just the responsibility of the private placement sponsor to confirm in writing that you are accredited given the criteria mentioned above. I've never had anybody verify the criteria, only ask that I confirm in writing.

Here's the link to the SEC website where they define an accredited investor and all the nuances involved. If I'm correct in reading your post, your goal is not to be a passive investor but to also be part of the operational entity that will purchase and operate the property. If that's the case then the bank or Freddie or Fannie will want to see much more than your accredited investor status. They will want to see liquidity, net worth, and if you have experience operating a multifamily property. What is your end goal?

There are many private placements that allow non accredited investors.  You do not need to be an accredited investor to sponsor a syndication. 

@Mark Kuster Is correct that you(or someone else signing on the loan) need to have a net worth equal to the loan, and 10% of the loan post close liquidity, and MF experience.  There is no accredited investor requirement on these loans.

Being in a MF deal as a passive investor does help.  Listen to my podcast.

@Jeff Greenberg  

Thank you for this - I will check out your podcast for sure.

My goal is to a part of a GP for the time being so that in the next couple years and I can be eligible for out of state Fannie or Freddie debt on my own. I have all criteria necessary except for the MF experience. 

@Mark Kuster

Appreciate this Mark. My goal is to start acquiring large (80+ units) properties in the next few years. I would like to start investing with a general partnership now with the intention of building credible MF experience in Fannie or Freddie's eyes, so that when the time comes I can be eleigible. I currently work in the affordable tax credit multifamily space and am interested in properties within this segment of the industry. 

@David Faulkner

Thanks for this! So essentially what you're saying is that there are many private placements within MF that are not monitored by the SEC - but clearly investing in these would pose more risk and would the experience also been seen as credible by Fannie and Freddie?

Monitoring is the wrong term. In order to do a PPM you must file a form D with the SEC.  There really is no monitoring unless there is a complaint. There are more stringent requirements on a 506c offering than a 506 b offering.

An accredited investor can be in either, but a non accredited can only be in a 506b.  Neither  would really be any safer than the other. In fact the SEC feels that the wealthy need less protection. The SEC does not even look at the deal. They may look to make sure that the SEC requirements are met.  This has nothing to do with the safety of the deal.

Updated about 4 years ago

In the 506 C the SEC want to assure that the investor is accredited, but there still is no protection at all from the SEC that it is a good deal. In fact less disclosures are required if you have all accredited investors.

@Jared Carpenter you can have a
1. CPA,
2. financial advisor registered with FINRA,
3. I believe a certain type of lawyer
4.and there is one more that I am forgetting

They can sign a document that is valid for 90 days that signifies you meet the requirements for an accredited investor. Many of the crowdfunding platforms require you to do this in order to be able to invest with them. I also believe syndications that file a 506(c) need this verification as well but don't quote me on that.

If you partner with a strong multi-family operator that does a syndication you can fast track yourself into your own 80+ unit deals fairly quick. The reason I say partner instead of passive investor is you need to be in the operating agreement to get the operational experience that the lenders require.  Unless you're quite wealthy you'll probably need to do your own syndication at some point. Partnering with a team that does syndication now will give you access to all the systems and processes that make the back office stuff work smoothly. You can't discount the amount of time and effort it takes to build that out, such as the Operating Agreement, PPM, Subscription Agreement, and myriad other documents. @jeff Greenberg puts out a good podcast, it's definitely worth listening to. You can also message me if I can be of any help. Good Luck on your journey

Usually accredited investors will fall into one of two categories....

1. Having a net worth of over $1M not including the value of their primary residence OR

2. Having an income of $200K for a single person or $300K for a couple for each of the last two years with the expectation it will continue in the current year.

The potential to both diversify broadly and own institutional real estate can be very powerful, and many of our investors have done just that.

I hope that helps.

Best- Leslie

Originally posted by @Jared Carpenter :

@David Faulkner

Thanks for this! So essentially what you're saying is that there are many private placements within MF that are not monitored by the SEC - but clearly investing in these would pose more risk and would the experience also been seen as credible by Fannie and Freddie?

 You are correct that there are many private placements, MF and otherwise, that are not as closely monitored by the SEC and other regulatory entities, but are still perfectly legal to invest in so long as you are an "accredited investor". What you will find the further down the rabbit hole that you venture is that risk is a funny and highly personalized thing. Risk in the passive investment sense of the word means beta, or the deviation of investment returns relative to some standard index, such as the S&P500. Risk in this sense is completely useless and non-nonsensical to an active investor ... an active investor could care less about such averages, because their business plan is not based upon being average ... they are only interested in their own risk, which is driven by their own ability to assess, control, and mitigate that risk in a particular investment that they are knowledgeable and have an edge in, even if that investment is a private placement. Of course, the catch is that everyone always thinks that they are an above average investor, just as everyone thinks that they are an above average driver, even though this is a statistical impossibility ... but the wrecks involved in thinking you are an above average investor when you are not are far more catastrophic than they are with driving ... Ask an educated passive investor an investment is risky, and they will ask what the beta is. Ask an educated active investor if it is a good investment and they will say it depends, are you a good investor? It is not that one is more credible than the other, it is just that they are different products geared towards a different type on investor ... the powers that be have determined that by the time you reach the financial level of "accredited investor" that you should be able to know the difference, or at the very least be able to lose the money that you invest in private placements without going BK. There are wonderful and there are horrible private placements, and it is in the truest sense of the latin words: caveat emptor. Determining if it is risky or not involves another latin phrase: Nosce te ipsum. The answer to this takes years of experience and reflection, alas it cannot easily be "Googled".

@Jared Carpenter Being an accredited investor actually has nothing to with what assets you invest in. The SEC typically defines who an accredited investor is and often can be tweaked. The whole idea behind this classification is to 'protect investors' by ensuring that an investor has a clue or some level of 'sophistication' to assess an investment to make an informed investment decision. 

The SECs reasoning for this is that if you are an individual earning a certain amount of money (in excess of $200,000 per year for instance), or are of a certain worth (say $1,000,000) or with certain assets or funds in the bank, the logic (however flawed) is that such a person by default must have an ability to make informed decisions about an investment and therefore is accredited.

Obviously one can have a PhD in Finance and be well qualified to make complex investment decisions and not be an 'accredited investor' but the SEC in an attempt to 'protect' investors, defines a class of investors that an 'issuer' of securities can legally solicit when trying to raise funds.

@Mike Fletcher, if someone has a PhD in Finance then they could qualify as a Sophisticated investor. I'm not saying that the reasoning behind it is not flawed, but at the same time an Accredited investor that loses $50k in an investment is not likely to go jump off a building over it. Without these rules in someway, unscrupulous people would be targeting grandma's retirement funds, etc. 

@Michael Le The SECs intent is not exactly to regulate the suicide rate due to an investor sustaining an investment loss. Its more about things like: protection of investors from scams, ensuring transparency and market efficiency etc.. 

Bernie Madoff ripped off some very sophisticated and accredited investors in every sense of the word. Investors whether individual or institutional and regardless of their level of sophistication will alway face the probability of investment loss because investments generally have an element of risk to it and you can't regulate a risky investment into a riskless instrument. 

But loosing money because you mistimed/misread the market or just bungled a forecast (and many PhDs are good at this), is different from loosing money because someone hid, failed to disclose or deliberately misrepresented a material fact through a fraudulent deliberate scheme of some sort. The material intent of regulating securities is to minimize any occurrence of such fraud or investor abuse.

If suddenly all buyers of real estate, residential or commercial, were required to meet the accreditation test because the SEC or government felt a need to protect the public that would really expose the flaw in the logic. This doesn't mean there aren't people with very sick intentions out there.

@Jared Carpenter Lane Aldrich can answer all your investment questions, he's with First Colony Mortgage and is my go to loan officer for investments.  We work with a ton of out of state investors who buy properties from us and I know he has a couple different programs he could talk to you about.  Good luck!

At the risk of hijacking this thread, I'll add a related question.  What are some ways to find a partner for a large deal who can bridge the gap so that the partnership team has net worth equal to the loan amount?  A gentleman who owns a local property management company with several thousand units under management and myself are considering partnering up to go after one or more under-performing local apartment complexes.  I bring experience self-managing 24 units for the past number of years, passive investment experience in a number of large syndications, experience managing extremely complex projects for a Fortune 50 company, and a network of high net worth individuals ready to invest with us.   Between us we have several million dollars net worth, and are confident that we can raise the capital required for a deal between our own funds and from accredited investors.  However, the deals we are looking at will require loans of $5m to $7m, and there is a gap of several million in net worth.  Ideas for partnering to plug the gap?

I’m currently going through primerica to take my series 65 in order to become accredited.

Anyone else looking into this? New rule 12/9/20 makes anyone with a series 65 an accredited investor