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 only, 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 an application or an approval process. 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:
1. 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.
2. Have a net worth of over $1 million, not counting your primary home.
Let's Look at Some Examples
Vicki 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. Vicki’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 Vicki an Accredited Investor?
Even though Vicki 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.
Vicki’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, Vicki is a non-accredited investor.
Meet Zoey & Evan
Zoey is a physician and earns $285,000 per year. Evan 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. Evan recently received $250,000 in inheritance.
Are Zoey & Evan 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, Zoey and Evan are accredited investors. Woohoo!
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.
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, you may just have to search harder to find them.
OR let me help you by joining the Generational Wealth Club.
Imagine with me, that your workday began with the usual routine, but halfway through your morning, you received the news you’d been laid off.
For most Americans, that means zero income starting tomorrow morning.
Now, let’s pretend that during your employment, you leveraged your money.
The rich don’t work for money. They make their money work for them. – Robert Kiyosaki
Three Types of Income
Most people’s income is active, which means it’s from a consistent paycheck. But wealthy people typically earn Residual or Passive income (or both!).
1. Active income is from your employer and requires activity in exchange for money. When you stop, the income stops.
2. Residual income means you receive money after the work is done. For example, every book an author sells provides residual income.
3. Passive income is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable sources of passive income.
Remember the job loss scenario? Let’s pretend you’d built passive income, on the side, during employment. Since being laid off, your earnings decreased by your monthly salary amount, but you still have income. Financial freedom is achieved when your earned passive income supersedes your active income.
So What's Best?
In my opinion, all three blended together is the perfect mix. For others, they only want one or two of these. Your goals for your legacy and family should help shape the right one (or mix) of these income types.
Investing in Stocks vs. Real Estate
Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month.
To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.
However, with real estate, $100,000 could buy a $400,000 rental home.
The bank brings $300,000 to the table. You put in 25%, the bank puts in 75%, and you earn 100% of the profits.
A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.
The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.
But I Don’t Want to Be a Landlord
Me either. The thought of it makes my stomach hurt - late night calls, constant repairs, late payments, etc. Truly nauseating.
Luckily, there is a better way - Real Estate Syndications!
This is where, instead, you join a small team to acquire real estate. When investing $100,000 in real estate syndication, it’s feasible to earn $8,000 per year (8%), similar to the stock market. Not bad.
However, the real opportunity lies in the sale of the asset. Syndications hold the property for about 5 years. During this time, building improvements are made and the land market value typically rises.
Upon the sale, you receive $160,000 ($60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return.
If, while employed, you’re able to create passive income, you’ll be less stressed when facing a layoff. You may even find yourself celebrating unemployment.
Set yourself up for success by investing in stable cash-flowing vehicles that can allow your to achieve peace of mind even when the worst of circumstances related to job loss present themselves.
When you first begin to consider real estate syndication as an investment option, it can feel lonely, intimidating, or even like you’re going in blindfolded.
I personally experienced fears around investing in a property I’d never seen, concern about how I’d get my family's money back, and doubt around the inability to log into an account and see my money. After all, being your family's hero (like Spider Man above) is amazing - you just don't want to mess it up.
These fears were addressed head-on through countless hours of research. Every article I read and every conversation I had built my certainty until I began to feel confident toward taking the plunge. While I can't take away the need for you to perform your own deep dive into various subjects, I can share my story and shortcuts for you to make your journey more efficient.
If you’re considering your first syndication and feeling hesitant, I recommend doing your research, connecting with other investors, reading through previous deals and taking your time.
Do Your Research
The best way to build your investing confidence is through self-education and research. Listen to podcasts, read books, and find websites on real estate.
Books I'd recommend you start with:
Podcasts I'd recommend you start with:
Relevant Facebook groups and forums like BiggerPockets can help you learn what questions you should be asking. It’s likely that other people have asked about your same concerns and, just by
reading through the forum’s questions and answers, you’ll gain clarity.
Remember there are no dumb questions and that you have the right to be diligent about gathering answers to your concerns.
Connect with Other Investors
A successful investor needs a supportive community, and considering that syndication is a group investment, you’ll want to get networking. Any new investors will share similar anxieties, questions, confusion, and excitement.
Experienced investors can provide invaluable firsthand accounts of their experience with various projects and sponsors.
Find other investors through online forums like BiggerPockets, local networking events, or by asking sponsors if they’ll connect you to their current investors.
Review Previous Deals
Finding comfort with financial projections, summary data, and investment lingo may feel overwhelming.
As you review more investment summaries, you’ll start to understand the flow of the deal packages, how each sponsor communicates, and exactly which investments interest you.
Take Your Time
Each new investment opportunity fills up quickly. This can make new investors panic and start to believe they are missing the best deals.
Remember, there will always be another opportunity.
Allow yourself time to complete the steps laid out here, so that when you make your syndication choice, you are confident about every step.
If you take nothing else from this article, remember it’s completely normal to feel skeptical, anxious, and even timid when making your first syndication commitment.
The ability to take action is what separates the successful from those who give up.
Your first real estate syndication deal is a huge milestone in your investing journey, and, even though your head might be spinning now, this is a time to savor.