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How To Tell Whether You’re An Accredited Investor, And Why It Matters

I first stumbled upon the term accredited investor when we were looking to expand our personal investment portfolio to include some commercial real estate investments.

If you know anything about me, you know that I’m a sucker for titles, everything from valedictorian to line leader. You name it, I’ve probably striven for it at one point or another in my life.

So when I learned about this coveted accredited investor title, I had to have it. But what the heck was it, and how could I get it?

One of the reasons being an accredited investor became increasingly important to me was that I realized that many of the passive commercial real estate investment opportunities I wanted to get involved in were open to accredited investors only.

There are some that will take non-accredited, sophisticated investors (i.e., investors who know a thing or two about real estate investing), but accredited investors have the golden ticket, so to speak, and really have the pick of the litter in getting into these deals.

As it turns out, there’s no formal process for applying for the title of accredited investor, and no certificate to frame for your wall. In fact, you don’t have to apply at all. Determining whether you’re an accredited investor is more or less a self diagnosis, based on a few simple criteria.

What is an accredited investor?

Okay, so what is an accredited investor? Quite simply, it’s someone who meets one of these criteria:

1. Over the last 2 years, you have had an annual income of $200,000 (or $300,000 for joint income), and you expect to earn the same or higher income this year.

OR

2. Your net worth, not counting your primary home, is over $1 million.

Examples

It sounds pretty simple, but financial stuff is almost never as simple as it seems at first blush. Just to make sure it’s crystal clear, let’s take a look at a few examples.

Felicia

Meet Felicia. Felicia is a single woman. She has been working in the corporate world for 10 years. She’s recently been learning about real estate, though she hasn’t invested in anything yet. She just got a raise 2 months ago and now makes $200,000 per year. Felicia’s primary home is worth $1.5 million. She has $700,000 in her 401K and $350,000 in her savings account and a few small brokerage accounts. She also has $100,000 left in student loans.

Is Felicia an accredited investor?

Even though Felicia 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 $200,000, so she doesn’t qualify on the income criteria.

Felicia’s net worth is the sum total of her assets, minus her liabilities (amounts owed), and excluding her primary home. I know, ouch. That primary home takes a big chunk off the table.

This comes out to $700,000 + $350,000 – $100,000, or $950,000, which is below the $1 million threshold.

Felicia is a non-accredited, though sophisticated, investor. Chin up, Felicia, there are still plenty of investment opportunities out there for you.

Jamie & Oliver

I’m not quite sure why the Naked Chef Jamie Oliver just popped up in my head, but there you have it. Now he’s a theoretical couple in this investing example. Anyway.

Let’s say Jamie is a physician. She earns $285,000 per year. Her husband Oliver is a stay-at-home dad, so he earns no income. They’ve been investing in real estate for a few years. On top of their primary home, valued at $800,000, they also have a single family rental, which they purchased for $500,000. They owe $200,000 on that rental. They have $250,000 in savings accounts. They have retirement accounts totaling $600,000 and recently received $250,000 in inheritance.

Are Jamie & Oliver accredited investors?

On the income criteria, Jamie and Oliver don’t qualify either, as they would need to make $300,000 as a couple.

On the net worth front, excluding their primary residence, their net worth is $500,000 – $200,000 + $250,000 + $600,000 + $250,000, or $1.4 million, which is above the $1 million threshold.

Because they meet one of the two criteria, Jamie and Oliver are accredited investors. Woohoo!

What does being an accredited investor get you?

A gold plated name card, a guaranteed table at the most exclusive restaurants in town, first class plane tickets anywhere in the world…

Okay, none of those things. But! You get the pride of knowing that you are, in the eyes of the SEC, smart enough with your financials that they don’t have to worry too much about you. And that’s something, right? Right?

For crowdfunded investments that are publicly advertised, such as through RealtyMogul, CrowdStreet, or RealtyShares, you will need to be an accredited investor in order to invest in the vast majority, if not all, of their offerings.

However, if you’re a non-accredited investor who happens to love real estate and are interested in investing in commercial real estate like apartment buildings that can make a difference in communities and the environment, have no fear. All hope is not lost.

There are investment opportunities out there for you, and often the returns are just as good as those that are exclusively for accredited investors.

However, investment opportunities for non-accredited investors can be harder to find, as none of them can be publicly advertised, due to SEC regulations.

If you’re curious or interested in learning more, consider joining the Goodegg Investor Club, where we’ll share more information about investment opportunities for both accredited and non-accredited investors.

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