Embarking on your real estate investment journey, you’re likely to encounter the term “Accredited Investor.” As you explore passive commercial real estate or crowdfunded investment opportunities, you might wonder if this designation applies to you.
Distinguishing between a sophisticated investor and an accredited investor is crucial, even for beginners. Fortunately, there’s no formal application or approval process; you can determine your status based on simple criteria.
What Defines an Accredited Investor?
To qualify as an accredited investor, you must meet one of the following criteria:
- Annual Income: Have had an annual income of $200,000 (or $300,000 for joint income) for the past two years, with an expectation to maintain or exceed this income in the current year.
OR
- Net Worth: Possess a net worth exceeding $1 million, excluding the value of your primary home.
Understanding Through Examples
Meet Vanessa
Vanessa, a single professional with a decade-long corporate career, recently received a raise, bringing her annual income to $200,000. Her primary home is valued at $1.5 million, and she has financial assets totaling $1.05 million, with a $100,000 student loan.
Is Vanessa an Accredited Investor?
Despite Vanessa’s current income meeting the criteria, her average annual income over the past two years falls short. Calculating her net worth: $1.05 million – $100,000 (loan) = $950,000. Vanessa, therefore, falls into the non-accredited investor category.
Sarah & Chris
Sarah, a physician earning $285,000 annually, and Chris, a stay-at-home dad, have a joint income below $300,000. However, their net worth, excluding their primary residence, surpasses $1 million.
Are Sarah & Chris Accredited Investors?
While their joint income doesn’t meet the criteria, their net worth of $1.4 million positions Sarah and Chris as accredited investors.
The Perks of Accreditation
The primary benefit of being an accredited investor lies in enhanced access to a broader array of investment opportunities. Accredited status signals to the SEC that you possess financial acumen, making you eligible for riskier ventures.
For non-accredited investors passionate about real estate, numerous opportunities still exist, including passive investments through real estate syndications. However, these opportunities may require more diligent search efforts due to SEC restrictions on public advertising for non-accredited investor offerings.
Understanding accreditation opens doors to a realm of investment possibilities, providing a clear path for investors to navigate the diverse landscape of real estate opportunities.
