If you have looked at real estate investments, or if you’ve seen information about investments online, you’ve probably noticed the term “Accredited Investor” or “506c” in an advertisement for the investment. While these terms are very common, if you’re new to looking at real estate, you may not know what this means. Or, maybe you’re not new, but you may be looking for a bit more clarity on what defines an accredited investor?
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Whatever your reason, if you’re interested in knowing more, keep reading and I’ll explain it in a way that’s hopefully easy to understand.
The title of “accredited investor” does not require an application or an official approval process by any specific agency. You can find out whether you are an accredited investor based on a few simple criteria that you can look up yourself. However, before investing in a syndication that requires accredited investors, you do need to be officially verified through the investment sponsor.
To qualify as 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.
While these definitions are fairly straightforward, it may also help to look at a few examples just to help use a situation that might be more relatable to explain the differences.
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Michael has had a corporate career for 10 years and is single. He just got a raise 2 months ago and now makes $200,000 per year. Michael’s primary home is worth $1.5 million. He has $700,000 in his 401k and $350,000 between his savings and a few brokerage accounts. He owes $100,000 to student loans.
Even though he currently makes $200,000, and has reason to believe he will continue
making that amount or more in the coming year, his annual income over the past two years has been below the $200,000 criteria. So, his income doesn’t qualify him as an accredited investor.
However, what if we look at Michael’s net worth? We have to ignore the value of his personal residence. If he has $700,000 in his 401K plus $350,000 between his savings and brokerage accounts – $100,000 from his student loan debt, that equals a net worth of $950,000. So, again Michael does not qualify as an accredited investor.
To review, since his income is at/above $200,000, but only just recently, he cannot qualify based on the income requirement. Also, his net worth is just under the $1 million requirement. Therefore, Michael does not qualify as an accredited investor. However, even though he is not an accredited investor, Michael can still invest in real estate syndications that are set up as 506b offerings which allow non-accredited investors.
Elizabeth is a physician and earns $285,000 per year. Steven is a stay-at-home dad, so he earns no income. Their primary home is valued at $800,000. They bought a single-family rental home for $500,000 and have a $200,000 balance on it. They have $250,000 in savings, plus $600,000 in retirement. Steven recently received $250,000 in inheritance.
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Based on income alone, they do not qualify, since their joint income is below $300,000.
However, we can also check to see if they qualify based on their net worth. Since we have the exclude their primary residence, we need to do their net worth calculation without it.
$500,000 for the single family rental – $200,000 still owed on the rental + $250,000 in savings + $600,000 in retirement accounts + $250,000 from their recent inheritance = $1.4 million, which is above the $1 million threshold.
Because they meet one of the two criteria, Elizabeth and Steven are accredited investors.
The main advantage of being an accredited investor is access to more deals. Why is this? The Security and Exchange Commission, SEC, regulates real estate syndications and based on the way the SEC looks it at, being an accredited investor means that you are financially savvy enough, and have enough financial knowledge and cushion, to have figured out how to accumulate some wealth.
Thus, more investment opportunities are open to you, since you are assumed to be in a better position to understand the investment and to take on risk. Accredited investors can invest in both 506c and 506b offerings, so they have more investment choices.
If you are a non-accredited investor, like Michael, who happens to love real estate, there is no need to be disappointed. There are still plenty of investment opportunities available, including passive investments through real estate syndications. The difference is you are limited to investments in 506b offerings only.
Since SEC regulations do not allow investments for non-accredited investors to be publicly advertised, you may just have to search harder to find them or find some General Partnership teams that offer 506b investments. There are many out there, including Progress Capital Group.
The returns offered on 506b or 506c investments are generally similar. So, even if you’re a non-accredited investor, you may not have as many options on which investments to choose, but you’ll still have investments with great returns to choose from.
At Progress Capital Group, we offer both 506b and 506c investments, so both accredited investors and non-accredited investors have an opportunity to invest in great real estate deals with great returns.
One big difference for non-accredited investors who want to invest in a 506b investment is that you need to have a pre-existing relationship with the General Partnership (sponsor) team. If you’re interested in learning more about investing and establishing a relationship, you can schedule a call here.If you’re interested in learning more about real estate, check out more articles on my website at www.progresscapitalgroup.com/blog. Or, sign up for my newsletter at www.progresscapitalgroup.com/newsletter.