“Are you an Accredited Investor?” – If you are new to the world of Real Estate syndication, it won’t be long before you bump into this question. I know, I did, on my very first phone call with a syndicator. Once you’ve established if you want to be Passive or Active real estate investor, it is also important to know the difference between an Accredited and a Sophisticated investor. Why? Because there are a lot of deals that are publicly announced which can only take accredited investors. You can find out whether you’re an accredited investor based on a few simple criteria.
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 take some real-life examples to illustrate the above better.
Meet AJ, an ivy league grad, who was recently promoted up the corporate ladder and now will make $200k in annual income (Bravo, AJ !!). His primary home is worth a million dollars. He has $650k in his 401K and $350k between his savings and brokerage accounts. He still owes $100,000 in student loans from those Ivy League days.
Is AJ an Accredited Investor? Even though he has reason to believe he will continue to make $200k or more in the coming year, his annual income over the past two years has been below the $200k criteria. 1 AJ’s net worth is $650k + $350k – $100k = $900k. Since his net worth is just under the $1 million requirement, AJ is a non-accredited investor.
Now let’s meet Barry and his wife, Michelle. Barry is a physician and earns $250k per year. Michelle teaches at a local school and makes $40k. Their primary home is valued at $700k. They bought a single-family vacation rental home in Orlando for $400k and have a $100k balance on it. They have $250k in savings, plus $500k in retirement. Michelle recently received $200k in inheritance.
Are Barry and Michelle accredited investors? Based on income alone, they do not qualify, since their joint income is below $300k. Now let’s check their net worth excluding their primary residence: $400k (vacation rental home) – $100k (loan balance) + $250k (savings) + $500k (retirement) + $200k (inheritance) = $1.25 million. Because they meet one of the two criteria, Barry and Michelle are accredited investors. Bingo!
As SEC sees it, being an accredited investor means that you have figured out how to accumulate some wealth and that you are savvy enough to understand the risks. If you are not an accredited investor and still interested in investing in real estate syndications, you can do it as a sophisticated investor by showing you have sufficient knowledge and experience from doing what you do in your business.