Can Non-Accredited Investors Still Invest In Real Estate?
This article explores the possibilities for non-accredited investors looking to venture into the lucrative realm of real estate. We will delve into various investment avenues, regulatory considerations, and strategies that empower non-accredited individuals to harness the potential of real estate in their investment portfolios. We will also highlight how non-accredited investors can work to become accredited investors.
Understanding Accredited Investor
An accredited investor is a person or entity allowed to participate in investments not registered with the SEC (Securities and Exchange Commission). These are generally high-net-worth individuals or companies that meet accreditation requirements to trade private, riskier investments.
Accredited Investor Requirements & Expectations
- Income Standards: Individuals should have an annual income exceeding $200,000 for two consecutive years, or $300,000 when combined with a spouse.
- Net Worth Requirement: A net worth surpassing $1 million, excluding the primary residence’s value.
- Consistent Earnings: The demonstrated expectation of reaching the same income level in the current year.
- Investment Knowledge: A clear understanding and awareness of the risks associated with the investments they are accessing.
- Documentation: Ability to provide financial statements or other documentation to verify income and net worth when requested.
Real Estate Syndications need accredited investors because sponsors can only allow accredited investors to subscribe to their investment opportunities. Likewise, the accreditation status solidifies the investors are financially sophisticated and can significantly enhance one’s ability to handle complex investment opportunities responsibly.
Common Misconceptions about Accreditation
- The first common misconception is once you’re an accredited investor, you can keep that status indefinitely. Accreditation lasts for five years and must be resubmitted for approval upon that deadline.
- The second misconception is that you must hit both financial benchmarks. To become an accredited investor, one must either hit the income standards or have the net worth requirement.
- The final misconception is there is no other way to become an accredited investor. The third way to obtain accreditation is to possess certain credentials, certifications, or designations as recognized by FINRA (Financial Industry Regulatory Authority).
Examples include Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative.
What is a Non-Accredited Investor?
Any investor who does not meet the income or net worth requirements set out by the SEC or who does not possess credentials, certifications, or designations recognized by FINRA.
Investment Options for Non-Accredited Investors
Real Estate Investment Trusts (REITs)
REITs allow anyone to own or finance properties the same way they invest in other industries, through the purchase of stock. REITs are attractive because they yield stronger payouts than traditional stocks on the S&P 500.
Advantages
- High yield dividends
- Portfolio diversification
- High liquidity
Disadvantages
- Dividends are taxed as ordinary income
- Sensitivity to interest rates
- Risks associated with specific properties
Crowdfunding Platforms
Crowdfunding is a method of online fundraising that involves requesting the public to contribute money or startup capital for new projects. It works by posting open calls for potential investors on websites, along with information about investment opportunities. This allows entrepreneurs to pitch their ideas directly to everyday internet users.
Opportunities and Risks for Non-Accredited Investors
Opportunities
- Crowdfunding offers the ability for non-accredited investors to become shareholders in a company or in a real estate property they would not have been able to have access to without accreditation.
- Another benefit of crowdfunding is portfolio diversification. By not investing all of their funds into the stock market, they also mitigate their risk.
- The third benefit is that there is a lower barrier to entry. In some cases, the minimum is $1,000 dollars to invest in a company.
Risks
- In many cases, the investment seeker needs to have a track record and is in the infancy stage of their project. This could mean a higher risk of losing an investment.
- There is a lack of regulation in crowdfunding and this could result in loss of capital.
Joint Ventures and Partnerships
What is the difference between Joint Ventures and Partnerships
A joint venture involves two or more persons or entities joining together in a particular project, whereas in a partnership, it is individuals who join together for a combined business.
- An example of a joint venture is Google and NASA developing Google Earth.
- An example of a partnership is Barnes & Noble and Starbucks. Each of their bookstores contains a Starbucks.
Key Differences:
- Duration: Partnerships are designed to last for the life of the business. They can run infinitely. In contrast, joint ventures are meant for short-term project lifetimes.
- Size: Joint ventures are limited in their scope and what they can accomplish. Partnerships, in contrast, can be huge.
- Culpability: In a Partnership the party at fault is responsible however, in a joint venture both parties are held accountable no matter who is responsible for the wrongdoing.
Working Towards Accreditation
Increase Income and Net Worth
The first step towards becoming an accredited investor is to find a way to increase your income. When your annual income meets or exceeds $200,000 for two consecutive years you are able to submit documentation for accreditation.
The second way your finances can bolster your ability to become accredited is through net worth. By acquiring assets or growing net worth through other means, to 1 million dollars (without the use of your primary residence) you may also apply for accreditation.
Financial Education and Planning
When starting the accreditation process, growing your knowledge base is extremely important. By developing a comprehensive financial plan you should create a target timeline and game plan to gain accreditation.
It is crucial to speak to financial professionals and experts who can walk you through the process and help you understand the nuances of the underwriting of a deal. This information is an invaluable tool for future investment opportunities and is a great way to build your foundation for investing.
Explore Alternative Routes
As we touched on earlier in this article, a common way for unaccredited investors to start their investment journey is through platforms such as crowdfunding. These alternative investment platforms allow you to explore real estate, start-ups, and tech options as well. By utilizing these platforms, new investors can learn about many types of investment options while gaining real-life experience. Remember to heavily vet the companies before investing as crowdfunding is not heavily regulated and is riskier than traditional investment sources.
Consult with Professionals
Remember we are not financial advisors or tax experts and we always recommend finding a reputable professional. All investments are risks but with the right guidance, you can have more confidence in your decisions.
Investment Strategies for Non-Accredited Investors
- Diversification and Risk Management- by diversifying your portfolio you also diversify your risk. Not all investments have the same timelines, rewards, or risks. This is the best way to build an investment foundation and create long-term wealth.
- Due Diligence and Investor Education- Never take something at face value. Due diligence is the best way to understand the investment, the sponsor, and the risk factors. If a sponsor isn’t willing to discuss risk, reward, and timelines, that is a red flag.
- Successful Non-Accredited Investor Participation- Some companies offer the ability to invest alongside them such as Streitwise. This company allows retail investors to gain passive income by using their platform to invest through an equity REIT.
Legal and Regulatory Considerations
- SEC Regulations and Exemptions-
- Non-accredited investors are limited by the SEC’s investment options.
- Sponsors have set regulations on disclosures and documentation available to non-accredited investors.
- Crowdfunding is open to all investors but non-accredited are regulated on investment amounts based on income.
- Exemption 506 B- allows up to 35 sophisticated unaccredited investors to participate alongside accredited investors. There are required financial statements that have to be submitted.
What is SEC Compliance?
The SEC requires syndications to comply with laws concerning securities selling. To stay compliant they must follow regulations controlling private placements found in SEC Regulation D.
Compliance Requirements for Syndicators-
- Forbids syndicate referral payments for anyone other than SEC-registered brokers
- Non-accredited investors receive additional disclosures
- Sponsors must provide offering documents
Investor Protection Measures- The laws protect investors from fraud and ensure that publicly traded companies provide accurate financial information. Companies file reports with the SEC to demonstrate compliance.
Resources and Further Information
Links to Relevant SEC Resources:
https://royallegalsolutions.com/syndication-sec-compliance
https://www.sec.gov/education/smallbusiness/exemptofferings/exemptofferingschart
https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
Recommended Reading and Additional Articles
Crowdfunding: https://lenderkit.com/blog/crowdfunding-rules-retail-vs-accredited-investors/
Non-Accredited Investing: https://goodegginvestments.com/blog/non-accredited-investing/
To learn more about accreditation, check out our blog: How to Become an Accredited Investor
Or learn more about Viking Capital by visiting our website: https://vikingcapllc.com/
