Accredited Vs Non-Accredited Investors: A Simple Guide (2020)
A detailed guide to understanding the difference between accredited and n.a investors.
Are you someone who’s interested in real estate investing? Are you on the lookout for starting your real estate investment journey? You must be someone who’s recently started taking an interest in real estate and its intricacies. Well… real estate is an opportunistic industry and it has the potential to offer sizable returns to those who know how to play their cards right.
Contrary to popular belief, investing in real estate is a great — sometimes an even better — way to increase your net worth. It can be better than investing in traditional stocks and bonds. The stock market with its bullish approach has given rise to a handful of overnight success stories. But its volatility makes it for an ill-reputed venture. In today’s day and age, anyone inclined towards investing knows the dangers associated with the stock market.
Real estate investment, however, offers less risk but at the same time doesn’t have the same kind of liquidity associated with stocks. Investing in real estate can prove to be a great alternative to traditional investment. It can help you diversify your portfolio and yield high returns. You can learn more about the benefits of real estate investing here.
If you’ve already done your research and gone through different crowdfunding platforms and investment groups, you might have come across a key condition required to start investing and that is being accredited. But what exactly does accreditation mean and how do you manage to get accredited? Today, we’re going to give you an answer to this common question:
What does an accredited investor mean?
The Securities and Exchange Commission (SEC) laid out a bunch of criteria for accreditation. According to the definition, an accredited investor is someone who fulfills at least one of the following criteria:
- Have an individual or joint net worth with a spouse exceeding $1MM (excluding your primary residence)
- Have an individual income of more than $200,000 or $300,000 jointly with your spouse for two consecutive years while sustaining or exceeding this figure in the current year.
- Be a general partner, executive officer or in a director level position in a company that issues unregistered securities and has assets exceeding $5MM in valuation.
The SEC implemented these definitions to protect rookie investors with less experience from entering into high-risk projects. Accredited investors carried the danger of sustain losses if a company they invested in tanked. These regulations were in place to curb the risks that unregistered securities brought with them.
Non-accredited investors:
Non-accredited investors are people who do not fall under the above-mentioned guidelines. These are people who don’t come under the net worth or annual income requirements laid out by the SEC.
If you are someone who has a net worth under $1MM and an annual individual income that is well within the $200,000 marker set by the SEC, then you are a non-accredited investor.
Being a non-accredited investor is not a bad thing, per say. It means you have alternative investment opportunities available for you. These investments may not carry the same level of high risk associated with those made by accredited investors.
Investment opportunities for Accredited Investors:
As accredited investors, you have access to investment opportunities that carry high risk but also offer high rewards. Based on your qualifications as an accredited investor, you have the option to invest in opportunities such as:
- Real Estate Syndication: A real estate syndication is a partnership between several investors who combine their skills as well as capital and resources to purchase and manage a property they otherwise would not have been able to buy.
- Real Estate Crowdfunding: Another high-yielding investment opportunity where several investors come together to invest in properties.
- Early Stage Venture Capital: Venture capital firms offer investment opportunities in the technology sector and carry higher risk for investors. At the same time, should a company bloom, the returns can be quite rewarding for investors.
- Hedge Funds: These investment structures often deal with diverse portfolios and complex trading. Hedge funds generally invest in liquid assets and are only open to accredited investors.
All these investment opportunities operate on a high risk/high reward model. Your prior experience as well as investment acumen should help you decide which area to venture in.
Investment Opportunities For Non-Accredited Investors:
It’s not the end of the road for non-accredited investors when it comes to exploring opportunities and there are many alternatives that offer high returns. Some of these opportunities are:
- Real Estate Investment Trusts(REITs): REITs are basically companies that own or manage income-generating properties. An investment in a REIT is not a direct investment in a real estate property but in the company itself. This helps non-accredited investors invest in real estate property without having to buy or manage a property themselves.
- Real Estate Crowdfunding: Real estate crowdfunding is yet another alternative to direct ownership of property or REITs. Here, n.a investors have the option to go for debt or equity investments.
- Peer-to-Peer Lending (P2P): Peer-to-peer lending offers investors a chance to invest directly in individuals instead of companies. This takes the form of personal loans while cutting out financial institutions as the middlemen.
Is Accreditation Necessary?
A lot of people seem to think that being an accredited investor is necessary to start your investment journey. In reality, nothing could be further from the truth. While accreditation opens up a lot of investment opportunities for you it isn’t a mandate you have to follow to become an investor.
Think of accreditation as the next level of your investment journey should you choose to go big. Traditionally, a lot of investment opportunities were only open to accredited investors making it a very elite club. In the recent years as the markets opened up and several relaxations in regulations came into place, investment horizons broadened and became more inclusive.
Expansion in SEC accreditation guidelines
The SEC updated its accreditation guidelines, on 26th of August, 2020. The new guidelines have loosened the barriers to becoming an accredited investor as more people could hope to participate in bigger investment opportunities.
According to the new guidelines, the SEC will allow individuals to qualify as accredited investors should they be able to prove ‘sufficient knowledge and expertise’ in investment and highlight their financial sophistication.
Simply put, the traditional way for an individual to be classified as an accredited investor was based on his net worth or annual income. As explained above in this article, the income level of $200,000 and $300,000 for individuals and couples respectively or a total net-worth of $1MM, excluding primary residence was the cut off.
However, with these changes in the guidelines, those with certain professional credentials and licenses — namely series 7, series 63, and series 82 would be eligible to be classified as accredited investors.
While these additions help people holding these licenses to participate in greater investment opportunities that go beyond all too familiar stocks and bonds, they still limit people who don’t necessarily hold these licenses but still have the investing acumen and experience to participate in bigger investment opportunities.
The Takeaway
Investments require rigorous and careful planning and consideration. While accredited and non-accredited investors both operate on different playing fields, both types have their own set of risks and rewards that they need to consider. What one must remember is that accredited investors also had to begin somewhere.
As a non-accredited investor, your primary goal should be to start increasing your net-worth as well as exploring different investment options that help generate multiple revenue streams. These explorations will help you amass wealth as well as increase your investment experience as you gain a better understanding of where to put your hard-earned money.
