If you’re looking into real estate investments, particularly commercial properties, you’ve probably come across the term “accredited investor.” Maybe you’ve spent time trying to understand all the complex terms and rules you found online. After researching, you might think, “That’s not me,” and consider giving up on your real estate investment dreams.
But here’s the thing: there’s a lot of confusion about being an accredited investor and the options you have if you’re not one. The truth is, being a non-accredited investor doesn’t close all doors to profitable real estate investments.
There are plenty of chances out there for you, and who knows? If you start learning and investing now, you might find yourself at the accredited level sooner than you think.
This article will take a deep dive into what you need to know as a non-accredited investor real estate. I’ll cover some common myths, show you how you can start investing right away, and give you some tips to become an accredited investor. Let’s get started!
Accredited investors have high income/net worth allowing them access to complex investments with higher risk/rewards, while non-accredited investors face more restrictions for their protection.
Non-accredited investors still have various real estate investing options like crowdfunding platforms, REITs, syndications, and investment clubs.
Tips for aspiring accredited investors include boosting income, education, leveraging partnerships, and reinvesting profits.
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Accredited vs. Non-accredited investor
The whole idea of separating accredited from non-accredited investors isn’t about dividing the rich from the regular crowd. Instead, it’s about implementing safety measures to protect investors, particularly those who are new to investing.
It all started after the stock market crash in 1929, leading to the Securities Act of 1933. That act was a crucial step in regulating finance, aiming to stop future crashes by making sure investors know what they’re getting into and can handle any losses that might come their way.
Who Counts as an Accredited Investor?
Accredited investors are people or businesses with enough financial knowledge and money to take on riskier investments, like private deals not open to the general public.
To qualify, you must meet one of the following criteria set by the Securities and Exchange Commission (SEC):
Income: If you’ve made $200,000 (or $300,000 together with a spouse) in the last two years, and you expect to make the same or more this year, you’re in.
Net Worth: If your net worth, or combined net worth with your spouse, is $1 million or more, not counting the value of your primary home, you qualify.
Professional Knowledge: Recently, the rules expanded to include people with certain professional certifications, designations, or credentials approved by the SEC.
Insiders: If you’re a director, executive officer, or general partner of the company selling the securities, you’re also considered an accredited investor.
Since accredited investors face almost no limits on their investing choices, they can put money into assets that regular investors can’t access, like:
Private Equity Funds
Venture Capital Funds
Big real estate projects
And the list goes on. It basically lets you grow your money in ways regular investors can’t.
What is a Non-Accredited Investor?
If you don’t meet the qualifications for an accredited investor, you’re considered a non-accredited investor.
In the past, they couldn’t access risky investments to protect them from big losses. But things like the JOBS Act and new online platforms have opened up more chances for these investors, still within rules to keep them safe.
What About Sophisticated Investor?
People often use “accredited investor” and “sophisticated investor” as if they’re the same, but they’re not.
A “sophisticated investor” has a lot of investment knowledge and experience, but they might not meet the financial requirements needed to be an accredited investor. They’re good at understanding what makes a good or risky investment.
While some sophisticated investors may also be accredited, the two are not synonymous, and not all sophisticated investors will meet the financial criteria to be considered accredited.
Most Common Misconceptions About Non-Accredited Real Estate Investors
Real estate investing has its fair share of myths and misconceptions, especially for non-accredited investors. Here’s a look at some of the most common myths:
Myth #1: Non-accredited investors have limited real estate investment opportunities:
Myth #2: Investments available to non-accredited investors offer lower returns:
There is a misconception that because certain deals are open to non-accredited investors, the returns must not be as good. But, the potential for returns depends on various factors, including the specific investment, market conditions, and the investor’s strategy, not just their accreditation status.
Myth #3: Non-accredited investors are less knowledgeable about investing:
Non-accredited status is determined by income and net worth, not by knowledge or experience with investing. Many non-accredited investors are well-versed in investing and understand the relationship between risk and reward.
Myth #4: Once you achieve accredited investor status, you keep it forever:
Accredited investor status is not a lifetime designation. It depends on your current financial situation, which can change. Investors should be aware of the criteria for accredited investor status and monitor their financial situation to ensure they continue to qualify.
Real Estate Investment Opportunities for Non-Accredited Investors
We’ve just debunked the myth that if you’re not an accredited investor, your investment options are slim. The truth is the real estate world is full of opportunities for everyone. All you need is to be open to new ideas and ready to put in some work, and you’ll discover there are plenty of ways to start investing in real estate.
Here are a few options to consider:
Direct property investment with lower minimum investment
Real estate investing trusts (REITs)
Real estate crowdfunding
Real estate syndication
Joining real estate investment club
Direct property investment of Non-Accredited Investors
Direct property investment is when you buy real estate properties yourself, like single family houses, condos, or small commercial properties. With this method, you’re in charge of everything, from buying to selling, and even deciding if you want to rent it out and handle the property.
Types of Direct Property Investment
Buy-And-Hold Rental Properties: Investors purchase properties to rent them out for long-term income.
House Hacking: House hacking means buying a property, living in one part of it, and renting out the rest to help cover the mortgage and other costs.
Fix-And-Flips: Investors buy properties in need of repair, fix them, and sell them for a profit.
BRRRR Strategy: This stands for Buy, Rehab, Rent, Refinance, Repeat—a method for building a portfolio of rental properties using refinancing to recover capital for future investments.
Why It Appeals to Non-Accredited Investors:
There’s something solid about owning a piece of real estate property, unlike stocks or bonds, which are just numbers on a screen.
If you choose wisely, your property can bring in regular rental income that not only covers your expenses but also leaves you with extra cash.
Plus, over time, the value of real estate usually goes up. This means you could end up making a good chunk of change when you decide to sell.
Non-Accredited Investors and Real Estate Investment Trusts (REITs)
If you prefer a passive approach to investing and don’t want to deal with the challenges of direct property ownership, real estate investment trusts (REITs) is a solid alternative. They are companies that manage, run, or fund income-generating real estate in various property sectors.
Here’s what you need to know:
Accessibility: REITs are accessible to all investors, regardless of their accreditation status.
Diversification: REITs offer a diversified portfolio of real estate assets, which can help spread risk. They can include various property types, such as commercial, residential, healthcare, and more.
Liquidity: Most REITs trade publicly on major stock exchanges. That means investors can buy and sell REIT shares just like they do with other company stocks.
Income Generation: REITs must distribute at least 90% of their taxable income to shareholders as dividends.
Low Minimum Investment: REITs typically come with very low minimum investments, sometimes as low as a few hundred dollars. This makes them an affordable entry point into real estate investing for non-accredited investors.
Non-Accredited Investors and Crowdfunding
Crowdfunding is a way of raising money by asking a large number of people for a small amount of money online. It’s a popular method for startups, projects, and individuals to fundraise for their ideas, products, or causes without going through traditional banks or investment channels.
While the JOBS Act and subsequent SEC regulations have opened up more opportunities for non-accredited investors, there are still limitations and rules that apply to their participation in crowdfunding.
Types of Crowdfunding Available to Non-Accredited Investors:
Equity crowdfunding lets people invest together in a startup company in exchange for equity shares. If the startup does well, you could expect some nice returns. But if it doesn’t, you might lose what you put in.
Debt Crowdfunding (Peer-to-Peer Lending)
Not all investing means taking an ownership share. With debt crowdfunding, investors lend money to individuals or businesses in exchange for regular interest payments.
Non-Accredited Investors and Real Estate Syndications
In real estate syndication, multiple investors pool their financial resources to invest in big real estate projects collectively. A general partner or sponsor handles tasks like identifying a property, overseeing any necessary repairs or upgrades, and overall asset management.
Meanwhile, limited partners invest money and receive passive income. They share in the project’s profits or losses without managing the assets directly.
Regulation Surrounding Non-Accredited Investors in Real Estate Syndication
The SEC has established Rule 506(b) of Regulation D to protect non-accredited investors participating in real estate syndications. This covers:
Sophisticated Investors: Earlier, we covered the concept of sophisticated investors, which means people with a high level of investment knowledge and experience. Generally, this regulation allows companies to sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors. However, these non-accredited investors must be “sophisticated.” Companies can validate sophistication in different ways, like requiring an advanced degree or minimum investing experience.
No General Solicitation: Under Rule 506(b), the issuer cannot make any offers or sales of the securities by any means of general advertising or solicitation.
Disclosure Requirements: Issuers must provide non-accredited investors with disclosure documents that generally contain the same information as provided in registered offerings, and they must be available to answer questions from prospective purchasers.
Non-Accredited Investors and Real Estate Investment Club
Real estate investment clubs are groups where people pool their resources, knowledge, and expertise to invest in real estate. They’re gaining popularity because they offer a chance for investors, especially those who aren’t accredited, to learn from each other and discover investment opportunities.
An example is SparkRental, which offers investment opportunities across various real estate sectors, including multifamily apartments, self-storage facilities, and mobile home parks. Typically, these deals require big capital, but through SparkRental, you can invest alongside others with just $5,000 to $10,000 per deal.
Being part of these clubs also lets non-accredited investors network with more experienced and sometimes accredited investors. This networking is great for gaining investing tips, learning about the market, and learning the ins and outs of real estate investing. Getting exposure to all this knowledge and experience can really help investors on their way to becoming accredited themselves.
Path to Accreditation
Admit it or not, achieving accredited status can significantly elevate your investing game. While non-accredited investors still have access to various investment opportunities, having accredited status opens up a whole new level of possibilities.
If gaining accreditation is a priority for you, here are some practical tips to consider:
1. Boost Your Income and Wealth
Getting raises, bonuses, or finding extra income sources can help you meet the accreditation thresholds faster. Similarly, building your net worth by saving smartly, making wise investments, and reducing debt can get you closer to accreditation. Monitor your finances closely and set achievable goals to steadily grow your income and wealth.
2. Educate Yourself
Educate yourself on real estate investing through courses, certifications, and seminars. A well-informed investor makes better decisions for financial growth. Also, connect with experienced investors and pros in real estate. Networking can lead to partnerships, mentorship, and unique investment opportunities.
3. Leverage Real Estate Partnerships
Joining real estate investment groups can provide opportunities to collectively invest in larger deals, spreading the risk and potential for higher returns.
4. Save and Reinvest
Trimming unnecessary expenses and saving more can free up capital for investing. Reinvesting dividends and profits instead of spending them can compound growth and build your wealth over time.
Whether you’re just starting or aiming to elevate your investing game, remember that being non-accredited is not a barrier but rather a starting point on your journey to success in real estate investment. Embrace the opportunities, stay informed, and watch your investment portfolio flourish.
Non-Accredited Investor Real Estate: FAQs
How can non-accredited investors participate in commercial real estate investing?
Non-accredited investors can participate in commercial real estate investing through avenues like crowdfunding, REITs, and syndications. These options allow non-accredited investors to pool their funds with others to invest in commercial properties, providing access to this asset class without the high capital requirements typically associated with direct ownership.
How do companies verify accredited investors?
Companies typically verify accredited investors by requesting documentation to confirm their income, net worth, or professional credentials. This documentation may include tax returns, bank statements, investment portfolios, or certifications. The company may also rely on third-party verification services or legal professionals to ensure compliance with regulatory requirements. Once the investor’s status is verified, they can participate in investment opportunities reserved for accredited investors.
How can non-accredited investors protect themselves from fraudulent investment schemes?
Non-accredited investors may not have access to the same level of information and resources as accredited investors. This can make it harder for them to conduct thorough due diligence and identify potential scams.
To protect themselves, non-accredited investors should verify the credentials of investment opportunities and sponsors, consult financial experts for guidance, and exercise caution when encountering promises of high returns with low risk. They should also be alert to warning signs such as pressure to invest hastily, lack of transparency, and assurances of guaranteed profits.