How to Become an Accredited Investor

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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.

Related: What is an Accredited Investor? (And The Arbitrary SEC Rules That Hurt Young Investors)

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.

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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?

  1. You can be aware of what it is and how you can get there.
  2. You can have the hope and promise of achieving the status and becoming eligible to invest in insider deals and specialized startups.
  3. You too can raise capital for your real estate deals.

Related: 8 of the Best Ways to Raise Capital for Your Investments

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?

Leave your comments below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

18 Comments

  1. Val Dychok

    Nice article Dave! Thank you!

    I recently realized that was completely unfamiliar with the term “accredited investor” while looking at passive investing topic. Had to google and found the challenging part – income requirement!

    Regards,
    Val

    • Dave Van Horn

      Hi Val,
      Thank you for the positive feedback!
      It’s an either/or requirement, though. For example, someone wouldn’t need to have a high income if they can acquire $1M in net assets, not including their primary residence. This could be acquired through investing in real estate (FMV of real estate assets minus the mortgage amount on the property).
      Best,
      Dave

  2. Prag Patel

    Tell me about it, I read opportunities from companies like “Raise” and Microventures, and have become extremely jealous of the opportunities for accredited individuals. Too bad there’s no shortcut, you have to make more.

    • Dave Van Horn

      Hi Prag,
      Thanks for your comment!
      It’s an either/or requirement. If you have $1 Million in net assets, you don’t necessarily have to have a high income. For example, if someone found an apartment complex, he/she could start a fund, since someone doesn’t have to be accredited to start a fund. Then over the next few years, that person could create forced appreciation and then refinance or resell the property. That person could potentially become accredited, based on their new net worth.
      I hope this info helps!
      Dave

    • Dave Van Horn

      Hi Honolulu,
      There isn’t a process for getting knighted; if someone reaches the requirements, they’re considered an accredited investor. However, many alternative investment funds require verification that an investor is accredited.
      Best,
      Dave

  3. Spencer B

    No one is missing anything in the “accredited investor” universe, although plenty of Reg D fund sponsors will make you think you are.

    Simply compare the historical returns of S&P500 and REIT index funds to Private Equity/Hedge Fund/Venture index returns, and you’ll see enormous out performance by the former, especially over the last 10 years. Yes, there are outlier funds that routinely beat the public markets, but they are almost all closed to new investors to avoid asset bloat, and if open, require institutional level minimums (8-9 figures).

    As someone who has managed and invested in Reg D funds, I think the investing public is doing just fine without “access.”

    • Dave Van Horn

      Hi Spencer B.,
      I agree with you that there are many different types of funds, and many start-up funds aren’t successful. But, I do believe that there are many more opportunities / investment options for an accredited investor. There are also some advantages to investing in a fund; for example, your exposure is limited to your investment. If you’re an investor who has knowledge in a specific field that a potential investment fund operates in, and/or you know the management team, their business plan, etc., it starts to change game. I would encourage all investors, whether their accredited or not, to perform due diligence on any of their investments.
      Best,
      Dave

  4. Bob Malecki

    Realize too that depending upon the exemption filed, some funds can have a limited number of unaccredited investors. Our fund allows for up to 35 non-accredited investors, although they still must be sophisticated and we must qualify them as well. So, don’t lose hope!

    Bob

  5. Brett S.

    While I appreciate the education you’re providing, and generally am quite fond of your posts, I have to disagree on this one.

    The accredited investor status is there to protect people vs exclude the poor. Higher return = higher risk (fact) and I’d guess your business requires people to be accredited to invest with you, so you may be slightly biased this time around.

    I don’t disagree at all that notes can be great investments but needs to be a balanced discussion. Otherwise, carry on.

    • Dave Van Horn

      Hi Brett,

      I understand where you’re coming from, and I agree that the SEC created the accredited investor status in an effort to protect people (although I don’t necessarily believe that it’s always successful), and I also agree that it’s often a risk = reward equation.

      However, after I became accredited, I had more options to choose from when it came to investing, and I invested in many different types of funds (besides just notes) long before I started a fund of my own. Just to clarify, we do have opportunities for both accredited & unaccredited at my firm, but my intent for this article was to provide an educational piece on accredited investors. Also, it was to build awareness of different opportunities, whether someone is an investor or whether they want to set up a fund to raise money for their real estate deals (since someone doesn’t necessarily have to be accredited to start a fund).

      All the best,
      Dave

  6. Mark B.

    Dave, What are the rules or guidelines about the primary residence when it is a multi family and you live in one and rent the other? Are you able to count the value of the rental side as non-primary residence?

    • Dave Van Horn

      Hi Mark,
      Thanks for your comment. Yes, you would be able to count the portion of the property that is a rental as non-primary residence, and the amount would be similar to what you use on your tax return.
      For example, let’s say you had a quadraplex worth $400K and you had a mortgage for $200K. If you live in one of the four units, you would have $150K in equity that you could count towards your net assets.
      I hope this info helps!
      Dave

  7. Edward B.

    I’ve been looking into getting verified as an accredited investor, but what is holding me up is the need to prove the value of my real estate assets. Everything I have seen requires you to have appraisals that are dated within the last three months. If you have multiple properties across multiple states and need all of them so you can qualify by the net worth requirement you are talking big money compared to providing a brokerage statement. Is there some other acceptable method of determining there value? BPO or assessed value perhaps? Even though the assessed value is often low, at least it is a matter of public record so it seems like it should be a viable alternative if the values are there. It just seems like having to provide appraisals every three months is unnecessarily prohibitive and there should be another method.

  8. Sean Lewis

    Hi Dave,

    Minor typo/edit, the SEC was established by the Securities Exchange Act of 1934. I believe you intended to reference the Securities Act of 1933 when you mention 1993.

    Regardless, helpful post. I’m of the opinion that assets and income are a poor proxy for investing intelligence. There should be an accredited investor test that can be taken to certify someone as accredited.

    Money doesn’t equate intelligence.

    “A fool and his money are soon parted.” -James Howell

  9. Hannibal Smith on

    The SEC tightened up the process a bit for affirming accredited investor status for the new online crowdfunding portal regulations and I believe also a new subtype of Regulation D that also operates online (which were what online portals were using before the crowdfunding regulations were fully completed). The more traditional “offline” 505 and 506 private placements of Regulation D merely required self-affirmation. Yes, that means all you had to do was declare yourself “accredited” and therefore you are. There was not a legal requirement by the sell side to actually verify it — hence, you were also a “sophisticated investor” if used your imagination to figure out how to justify it.

    What more and more is being conflated nowadays is the new process that requires affirmation by the sell side. That can be merely a screen shot of all your financial account balances, net worth, etc. and does not have to involve bureaucratic busywork. It is solely up to the sell side as to how far they want to go within the possibilities the SEC laid out. Some are very anal about it, some are more relaxed. It’s also important to note that affirmation by the sell side was intended for private placements using general solicitation that is now allowed under the new crowdfunding rules, but I have noticed and experienced conflation or standardizing of the new process also being applied to “offline” private placements.

    Yes, accredited investor status is putatively stupid and a sophisticated investor test makes much more rational sense (but so far, the SEC seems to be going way overboard and are talking about requiring proctored exams!). Having a near top 5% income or net worth hardly means said person is intelligent nor sophisticated. But, it helps to put the regulation into perspective in that it was a response to the Great Depression and the ordinary Boobus Americanus losing virtually all of their money in unregulated and scam mutual funds on Wall Street. So $1 million was probably the top .1% back then. For the time, it was a practical solution, but horribly quaint nowadays.

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