If you’ve been learning about real estate investing, there’s a good chance you’ve come across the term “accredited investor.” If not, well here it is. Once you notice how many passive real estate funds or crowdfunded investment opportunities are publicly advertised and therefore limited to accredited investors, you may get curious. 

Even if you’re a total newbie, it’s important to know the difference between a sophisticated investor and an accredited investor and if you’re one of them.

Neither of these titles requires an application or an approval process. You can find out whether you’re an accredited investor based on a few simple criteria. 

What to Look For

To be 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.

OR

2. Have a net worth of over $1 million, not counting your primary home.

It May Help to Run Through Examples

Meet Denise

Denise has had a corporate career for 10 years and is single. She just got a raise 2 months ago and now makes $200,000 per year. Denise’s primary home is worth $1.5 million. She has $700,000 in her 401K and $350,000 between her savings and a few brokerage accounts. She owes $100,000 to student loans.

Is Denise an Accredited Investor?

Even though Denise currently makes $200,000 and has reason to believe she will continue making that amount or more in the coming year, her annual income over the past two years has been below the $200,000 criteria.

Denise’s net worth is: $700,000 (401K) + $350,000 (savings and brokerage accounts) – $100,000 (student loans) = $950,000,

Since her net worth is just under the $1 million requirement, Denise is a non-accredited investor. If she has experience investing in real estate, she may be a Sophisticated Investor, but we won’t go into that here. 

Mia & Jake

Mia is a physician and earns $285,000 per year. Jake 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. Jake recently received $250,000 in inheritance.

Are Mia & Jake Accredited Investors?

Based on income alone, they do not qualify, since their joint income is below $300,000.

However, excluding their primary residence, their net worth is…

$500,000 (single family rental) – $200,000 (balance owed on single family rental) + $250,000 (savings) + $600,000 (retirement) + $250,000 (inheritance) = $1.4 million, which is above the $1 million threshold.

Because they meet one of the two criteria, Mia and Jake are accredited investors. Woohoo!

What Are the Perks?

The main perk of being an accredited investor is access to more deals. Why is this? 

Well, in the eyes of the SEC, being an accredited investor means that you are savvy enough to have figured out how to accumulate some wealth. Thus, more investment opportunities are open to you, since you are in a better position to take on risks. 

If you’re a non-accredited investor who happens to love real estate, there are still plenty of investment opportunities available, including passive investments through real estate funds and joint venture partnerships. However, 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.

Joining a group’s Investor Circle, typically gets you more access to different types of deals. You’ll also get the chance to get to know who you’ll be working with through a phone call and other content. Take the time to do this since they will be helping to steward your investment dollars in real estate.

And of course, plan a celebration when you hit that coveted Accredited status!