Thanks to the popularity of crowdfunding and person-to-person (P2P) platforms — especially in the real estate sector — there are more opportunities than ever before to invest beyond publicly listed stocks. However, you may have noticed that many of these deals require investors to be accredited. What is an “accredited investor”? How do you become one? If you don’t qualify, are you totally shut out of this market forever?
What Is an Accredited Investor?
Basically, an accredited investor is a person or entity who has been deemed capable of taking on the increased risks associated with certain investment offerings. Think venture capital funds, private-placement deals, hedge funds and — yes — real estate crowdfunding opportunities.
Accredited investors have the best choices when it comes to investment options beyond exchange-listed securities. And entities offering these investment opportunities benefit from having accredited investors interested in their projects.
For example, a company in need of capital may offer private stock to accredited investors. This will exempt the company from the high costs of registering its securities with the government’s regulatory authorities and holding a public offering.
Here in the United States, the Securities and Exchange Commission (SEC) determines the criteria for an accredited investor. But there’s no set process that officially hands you accredited status. So don’t expect a fancy certificate in the mail.
Instead, it’s up to each individual company to do its due diligence and determine whether you fit the criteria set by the SEC before you invest in its offerings.
What Are the Requirements?
To qualify as an accredited investor, a person must meet one of two tests:
- Have an annual income of at least $200,000 (or $300,000 for joint income with a spouse) for the last two years with the expectation of earning the same or higher income in the current year; or
Have a net worth exceeding $1 million, either individually or jointly with their spouse.
The value of your primary residence can’t be included when calculating net worth. But on the flip side, your mortgage doesn’t count against you, up to the fair market value. If calculating joint net worth with a spouse, it is not necessary that property be held jointly.
Here’s a handy table from the SEC showing how to determine if you qualify using the net worth test:
|Jane Doe||John Smith||James Lee|
|Primary residence (not included except for related liabilities below):|
|Home equity line||—||$150,000||—|
|TOTAL INCLUDED ASSETS||$1,220,000||$1,220,000||$1,220,000|
|Student and car loans||$100,000||$100,000||$100,000|
|Portion of mortgage underwater||—||—||$100,000|
|Balance on home equity line (less than 60 days old)||—||$100,000||—|
|TOTAL INCLUDED LIABILITIES||$200,000||$300,000||$300,000|
What Are the Best Opportunities for Accredited Investors?
In 2012, Congress passed the Jumpstart Our Business Startups (JOBS) Act. This includes provisions that have allowed crowdfunding platforms to flourish. In a nutshell, one of these provisions is to allow companies to solicit capital from anywhere as long as the investors meet the SEC’s requirements for being accredited. Previously, the companies could ask for investment dollars only from people in their network.
If you’re an accredited investor, you can now take part in potentially lucrative commercial real estate opportunities from these platforms (among many others):
- Lending Home
- Patch of Land
- Realty Mogul
What If You’re Not Accredited?
Most of the real estate crowdfunding platforms popular today are open only to accredited investors. But that doesn’t mean those who don’t qualify can’t participate in this hot market.
Many of these opportunities are private REITs (real estate investment trusts). These investing instruments are similar to stock in that you can purchase shares of them. However, by law, REITs are required to pay out 90% of their earnings in the form of dividends, in addition to having tax advantages. (You can read more about non-traded REITs here.)
Here are some of the opportunities that don’t require investors to meet the criteria set by the SEC:
- CrowdStreet: Medalist Diversified REIT gives you the opportunity to invest in multifamily, “flex-industrial,” retail and limited-service hotel properties in the Southeast.
- Fundrise: eREITs and eFunds allow investors to benefit from growth in multiple commercial real estate properties. The minimum investment is only $500.
- Realty Mogul: Two MogulREIT products open up the platform to non-accredited investors. MogulREIT I provides exposure to multi-family, office, industrial, retail, self-storage, medical and hospitality properties. Mogul REIT II has a focus on apartment buildings.
- Rich Uncles: NNN REIT is invested in property leased by retail companies. Rent is collected and then paid out to REIT shareholders as dividend income on a monthly basis.
- Roofstock: This platform is a bit different. It allows investors to buy cash-flow-positive rental property outright. Every deal is rigorously pre-vetted. This removes some of the risk of traditional real estate fix-and-flips.
Accredited investors get the “pick of the litter” when it comes to investment options beyond exchange-listed securities. If you meet the criteria, these options are great.
However, if not, don’t be discouraged — there are plenty of interesting options out there. We’ve reviewed many of them here at Investor Junkie.
Are you satisfied with the number of real estate crowdfunding opportunities open to non-accredited investors? Do you think companies should require investors to be accredited? Let us know your thoughts on the matter.