Perks to becoming an accredited investor?

Question

Are there perks to becoming an accredited investor if one is planning to just invest in SFH/MFH? Does the designation help in building networks or being looked upon more favorably by lenders?

Jay Hinrichs · Answer

I think on its face  the major perk is that you have achieved a level of income and net worth that puts you in the top probably 5 to 10% of all Americans and for that there is a feeling of accomplishment..

but on a transactional side it opens up as others have stated many different investment vehicles that are only open to accredited investors.. but choose wisely !!!  not all are great or will do well.

Kim Lisa Taylor · Answer

As @Saul L. pointed out, "accredited" is not something one "becomes"; you either meet the definition or you don't. You meet the definition of an accredited investor if you have:

• Over $1M net worth, excluding any equity in your primary residence, or
• Make over $200k/year if you are single*, or
• Make over $300k/year if you are a married couple*.

*The income classification requires that you have met the qualifications for the past 2 years with an expectation that it will continue indefinitely into the future. There are other definitions for legal entities, but generally, the entity must have >$5M in equity or all of their members/beneficiaries/shareholders must meet the accredited definition above. Sponsors/managers of their own securities offerings also fall within the definition of an accredited investor.

The confusion seems to stem around whether one should get "verified" as an accredited investor, which entails getting a certification letter from your own CPA, Attorney, or Registered Investment Advisor, or from a third party verification company, who reviews the investor's financial information and then "verifies" whether they meet the accredited investor definition above.

The burden is on the issuer of a Rule 506(c) securities offering to have a reasonable assurance that all investors are accredited prior to accepting their funds. However, the SEC requires that the verification is dated within 90 days  of the investment. This is not so with Rule 506(b) offerings, where investors can self-certify that they meet the financial qualifications, but must have a pre-existing relationship with the sponsor before an investment offer is made, and no advertising of the offering is allowed.

Bottom Line:  It won't help you to get "verified" unless you will be making an  investment in a Rule 506(c) offering within  the next 90 days and you will have to prove how you meet the accredited investor definition in order to do so.

Ian Ippolito · Answer

@Dan F., Abigail is right.  But to look at this from another angle, there is an advantage in being accredited investor with your investment options. Nonaccredited investors are almost always limited to investing in properties directly themselves, which requires active management, and generally limits the size of what they can invest in. If you are an accredited investor, you can still do that if you want. But then you also have the option of investing passively via syndication/crowdfunding. This allows many advantages over doing it on your own such as being able to invest in much larger properties, a larger number of asset classes, more geographic diversification, lower borrowing costs, a lot less work once you are in the deal etc. The trade-off is that you have to feel comfortable vetting a manager who you will give full control to.

Nate R. · Answer

It opens up a lot of opportunities that otherwise wouldn't be available. If you're accredited, there are many private placements you can get into as a passive investor. Most deal sponsors use SEC exemptions that require investor accreditation to allow them to quickly find capital through advertising and other forms of solicitation.

As a non-accredited investor, you're limited to either deals you do yourself, or if you can cultivate relationships with deal sponsors, there are limited numbers of private placements that will allow "sophisticated-but-unaccredited" investors. There will be fewer of these and it will require some networking to create those relationships.

Until you can be accredited, here are some of the options I see:

1) Stick to being an independent rental owner. This is a lot of work but you will have total control and the only limitation is access to your own capital.

2) Become a syndicator: Also a lot of work, but it gives you access to a large pool of capital and you don't need to be accredited, but you need credibility (experience, knowledge) with investors before they will invest their money with you.

3) Get to know deal sponsors so that when they do an offering, they can take sophisticated investors that they have a previous relationship with.

4) From your question, I'm assuming you have an interest in just investing and letting others do the work for you. If you just want to be passive and aren't interested in pursuing private placements because you aren't accredited, consider one of the following options:

a) Turnkey rentals: This is mostly hands-off, but there is some due diligence and paperwork required for every single transaction. It is no more scalable than being an owner of SFR's but at least someone else (the turnkey provider) does all the upfront work, and a professional property manager handles the operations.

b) Buying securities like REIT's (publicly traded or unlisted REIT's like those offered by Fundrise, Realty Mogul): Advantages are instant diversification, low investment minimums, liquidity (this varies), the ability to play in all kinds of sectors of real estate (residential, office, industrial, storage, etc). Disadvantage is you get none of the tax advantages of direct ownership, so these are best purchased in a retirement account.

5) Continue saving and investing smartly until you reach either $1M in net worth or you earn $200,000/year in income!

Jillian Sidoti · Answer

Hey @Dan F. - what a great question! You're either an accredited investor or your not. It's not a designation, per se.

As for the perks - HECK YES! More opportunities for you to consider!

Real simple: if you make $200,000 a year as an individual, $300,000 as a married couple, OR have a net worth of $1,000,000, you are accredited.

If you are looking to get "proof" of this, you can have your CPA, attorney, RIA, or a third party, like verifyinvestor.com, provide you a verification letter for 506(c) offerings.

I hope this helps! Good luck out there!

Todd Dexheimer · Answer

Being accredited allows you to get access to investments that the other 95% of the population can't. It also allows you to get loans easier, not because you are accredited, but because you have more money than non-accredited.

Abigail Hollar · Answer

Becoming an accredited investor is only meaningful if you're going to invest in alternative investments like non-traded REITs, BDCs, hedge funds, and so on through your broker/dealer. It does nothing for you professionally. The only people interested in talking to accredited investors as accredited investors are investment sales people who can't sell their product to non-accredited investors due to securities laws. Also, lenders don't care. Being an accredited investor is irrelevant to your ability to repay a loan.

Dan F. · Answer

@Ian Ippolito - Yes I'm just starting to learn about syndication/crowdfunding which is how I stumbled upon this term in the first place. Still learning about doing deals this way vs "one house at a time" for someone just starting out

@Mike Dymski- It's becoming more obvious to me that there is always some value-to-money trade off in every way of REI (and life?). As a beginning investor with an enjoyable W-2 job, I'm still figuring out exactly how to value my own time when it comes to the passive vs active investing spectrum.

@Jay Hinrichs- well said!

@Todd Dexheimer- Makes sense that the value of being "accredited" comes from the money rather than the designation

@Saul L.- Excellent point; I'm mixing up the term "accredited" with "verified/certified"

Account Closed - Great post. I resonate with the confusion around getting "verified" though this sounds like this verification process is investment specific. I'll need to learn more about the differences between Rule 506(c) vs 506(b).

Thanks all. This is very helpful information all around.

Account Closed · Answer

I am an accredited investor. But every time anyone asks, I have only self certify and state that I meet the requirements of the SEC definition. Its a legal CYA needed by private placement funds. If you lose your money and say I didnt understand the risks then they can say as an Accredited investor you should know. Thats about the sum of it.

Paula Sabrsula · Answer

Thanks for sharing!

Perks to becoming an accredited investor?

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