When you first step into the realm of real estate investing, you’ll quickly encounter the term “Accredited Investor.” As you explore passive real estate opportunities, you’ll notice many are exclusively available to accredited investors.
Even as a newcomer, it’s crucial to understand the distinction between a sophisticated investor and an accredited investor, and whether you fall into either category.
It’s important to note that neither of these designations requires a formal application or approval process. You can determine your accredited investor status based on a few straightforward criteria.
Key Criteria for Accredited Investor Status
To qualify as an accredited investor, you must meet one of the following conditions:
OR
Let’s examine a couple of scenarios to illustrate these criteria:
Scenario 1: Meet John
John, a marketing executive with 12 years of experience, is unmarried. He recently received a promotion, boosting his annual salary to $210,000. His primary residence is valued at $900,000. John has $600,000 in his 401(k) and $300,000 spread across savings and investment accounts. He carries $80,000 in student loan debt.
Is John an Accredited Investor?
Despite John’s current $210,000 salary and positive income outlook, his earnings over the past two years fell short of the $200,000 threshold.
John’s net worth calculation: $600,000 (401(k)) + $300,000 (savings and investments) – $80,000 (student loans) = $820,000
With a net worth below $1 million, John does not qualify as an accredited investor.
Scenario 2: Alex & Jamie
Alex, a software engineer, earns $275,000 annually. Jamie, a part-time consultant, makes $50,000 per year. Their primary home is worth $1.2 million. They own a duplex valued at $600,000 with a remaining mortgage of $250,000. They have $300,000 in savings and $700,000 in retirement accounts. Alex recently inherited $200,000.
Are Alex & Jamie Accredited Investors?
Their combined income of $325,000 meets the joint income criterion of $300,000.
Additionally, excluding their primary residence, their net worth is: $600,000 (duplex) – $250,000 (mortgage) + $300,000 (savings) + $700,000 (retirement) + $200,000 (inheritance) = $1.55 million
Meeting both criteria, Alex and Jamie qualify as accredited investors.
Benefits of Accredited Investor Status
The primary advantage of being an accredited investor is access to a broader range of investment opportunities. The SEC views accredited investors as having demonstrated financial acumen through wealth accumulation, thus allowing them access to potentially riskier investments.
For non-accredited investors passionate about real estate, numerous investment options remain available, including passive investments through real estate syndications.
However, SEC regulations prohibit public advertising of investments for non-accredited investors, potentially requiring more diligent searching to uncover these opportunities.
At Goodin Development, we work with accredited and sophisticated investors. Apply to join our Investor Club so you can get notified when we have our next passive investment opportunity.
