One of the things that make real estate investing great is that you can get started and prosper at almost any level of your financial life. For example, our founder began by renting out the basement of his primary residence to cover his mortgage. That was his first step in what became a successful career of growing his wealth and the wealth of others.
There are abundant opportunities to invest if you know how to take advantage of them. But there are limits to what you can do when you are just starting. Some investment types are only available to people who are among a class of investors legally defined as accredited investors.
When you become an accredited investor, the doors will open to new investment opportunities.
Anyone can invest in most real estate deals as well as in stocks and bonds. But there are many offerings that have the potential of yielding higher returns that are only available to accredited investors.
The Securities and Exchange Commission (SEC) created the requirements for accredited investors to protect people from getting in over their heads with their investment choices. Investing involves risk and it is never a good idea to invest more than you can afford to lose. So that is why some investments are only available to people who meet certain criteria.
These investments might include private equity investments, hedge funds, venture capital deals, and any security that is not registered with the SEC. These investments have the potential for higher returns, but they may also involve more risk.
Once you meet those qualifications, you will have to adjust your strategy.
What are the guidelines for being an accredited investor?
Both individuals and organizations can become accredited investors if they meet one of the following criteria for net worth, income, or financial sophistication. They don’t need to meet all of the standards.
Individuals or families need to have a net worth of over $1 million, not including their primary residence. They can also demonstrate a yearly income of $200,000 (or $300,000 with a spouse) for two years in a row with a reasonable chance of earning the same in the next year. Investment professionals in good standing can be accredited investors with or without the net worth or income if they hold the Series 7 securities license, the Series 65 investment adviser license, or the Series 82 private securities offerings license. General partners, directors, or executive officers of the company selling the securities also qualify as well as certain “knowledgeable employees” of investments in a private fund.
Organizations can qualify if they own more than $5 million in assets or if all the owners are accredited, investors. Entities such as corporations, LLCs, trusts, partnerships, employee benefit plans, 501c(3) organizations, or family offices can qualify. Registered investment advisors and SEC-registered broker-dealers can be accredited investors, banks, insurance companies, business development companies, registered investment companies, or small business investment companies.
There isn’t a formal process to become an accredited investor, and you won’t be given a certificate from a government agency acknowledging your status. But it is certainly worth your time to evaluate whether you are in this class because, as an accredited investor, you will have more opportunities to make money than a non-accredited investor.
Again, investors only need to meet one of the qualifications and be able to back it up with documentation.
The companies that issue unregistered securities are responsible for determining the status of their investors.
Most companies must register their investments with the SEC and submit to regulation. The exception is when the firms sell their assets to accredited investors.
The companies that do this need to conduct due diligence before the sales to determine the status of each investor.
As a real estate investor, this status gives you opportunities to diversify and reap bigger rewards.
It’s exciting, like finally shifting into a higher gear on the highway and feeling yourself surge forward quickly and easily.
Before you leap into action, there are a few things to consider.
For starters, understanding the pros and cons of investing at this level. The best part is that you can get involved in unique investments that are not strictly regulated, which means that you can diversify your portfolio and get higher returns. On the downside, there is an increase in risk; you may be required to invest more, there may be high fees involved, and your investments may not be available to be liquidated whenever you want. More care is needed to examine the opportunities that come across your desk.
Discover what you can do with your money that you couldn’t before. A lot of clients ask whether it’s better to get into residential real estate or commercial real estate. The answer is it depends on what your goals are and what resources you have to work with. But the truth is that many commercial real estate deals are more lucrative but still out of reach for non-accredited investors because of the amount that is needed.
What are some of the repercussions of being an accredited investor? One of the biggest downfalls of being an accredited investor is that you are a high earner or have a high net worth, which may mean that you are paying a lot more in taxes. Some of our clients come to us saying that they are earning more than ever but still struggling to cover their expenses and not seeing their wealth grow. When we look at their investment statements, it is often the case that they are losing a lot of their potential earnings through bank fees.
The three shifts that you need to make as an accredited investor
- The first shift that you need to make is to become more connected with your money. You have worked hard for your money, and now it is time to do the right things so that your money will work hard for you. That starts with opening your statements at least once every three months and knowing what is happening.
- Drastically reduce expenses and taxes. If your money is tied up in an investment that drains all your potential earnings with high fees, now is the time to move it to something that will work harder for you. In addition, you may be paying taxes at a high rate and not holding on to your wealth as you could. There are solutions to this problem, and the most effective is starting a business or a franchise and lowering your tax burden.
- Increase your potential for growth with higher-earning investments. At BG Wealth, we provide our clients with several avenues to grow their wealth, like private lending, real estate investments, and franchise opportunities.
