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How to Become an Accredited Investor

Accredited investors have access to investment opportunities that aren’t available to others. If you’re interested in certain passive real estate investments such as private money lending or debt syndication, you may have found that you need to be an accredited investor. So what is this term and how do you become one?

What is an Accredited Investor?

The term accredited investor is a little bit misleading. Usually, if something’s accredited, there’s an accompanying certificate or badge of some kind. With accredited investors, there’s no certificate or anything that goes along with it. There’s no governing agency with a list of accredited investors that you have to somehow try to get on.

In the term accredited investor, the word “accredited” means to be qualified. So you could say “qualified” investor and it would mean essentially the same thing – that you’re qualified to participate in certain private investment opportunities.

Why Do You Have to be Accredited to Invest?

You don’t have to be an accredited investor to invest in everything. There are lots of ways to invest in real estate and other things that don’t require accreditation, such as stocks, bonds, and mutual funds. In fact, most investments don’t require it. Only certain types of investments like hedge funds, certain private placement deals, and others require accreditation as suggested by the federal government and the Securities and Exchange Commission (SEC).

On the surface, it may seem unfair that the government discourages certain investors from the chance to profit from certain opportunities. The reasoning behind it makes sense, though. The investment vehicles that require accreditation are much more complex than standard investments. They necessitate a deep understanding of economics and finances that an ordinary person might not have. The SEC guidelines are not intended to exclude, but to protect ordinary citizens from investing their hard earned money and savings into something they don’t fully understand. They might be taking on financial risks that they aren’t aware of, and that’s the first rule of investing – that you should fully understand the risks you’re undertaking.

What Qualifies an Accredited Investor?

The SEC provides guidelines that determine who would be an accredited investor in Section 501, Regulation D. Those guidelines state that you have to meet one of the following criteria:

  • Net worth exceeding $1 million either individually or with your spouse, not including your primary residence.
  • Earned income exceeding $200,000 in both of the previous two years in the case of an individual, or earned income exceeding $300,000 in both of the previous two years in the case of a married couple. The individual or couple must also demonstrate the likelihood of maintaining that income threshold for the current year. Further, you would need to have met this income in the same way for all three years, either as an individual or as a married couple. It can’t be calculated one year as an individual and then the next two years as a couple.

The idea is that an individual or a couple who has those kinds of income levels a) have enough resources to recover from some losses, and b) have the financial savvy to understand more complex investment transactions.

How to Become an Accredited Investor?

Companies that offer certain investment opportunities such as debt syndications and private money lending have an obligation to their investors and to the companies they represent to ensure that confidential investment information is only passed on to accredited investors and that only accredited investors become part of the investment group. But as mentioned earlier, there is no certificate or governing authority that issues a sealed document ascertaining your accredited investor status. One reason for that is that you might be accredited one year and not the next. So there’s no blanket designation that qualifies you to invest in private investments.

Instead, what scrupulous companies do is set in place an internal process whereby they screen potential investors to ensure that they meet minimum qualifications. Once you’re accredited with that company, you likely won’t have to go through the screening again for future investments until or unless your financial circumstances change or the company policies change. However, being accredited with one company doesn’t necessarily carry over to a different company. Each company will have their own screening process.

What’s Included in the Screening Process?

To become an accredited investor and be eligible to review a confidential Primate Placement Memorandum (PPM), you may be asked to provide things like:

  • Financial records from banks and other financial institutions
  • Credit report
  • Tax returns
  • W-2s

You may also be asked to confirm verbally that you qualify as an accredited investor. No two companies have the same screening process.

What To Do If You Don’t Meet Minimum Qualifications?

Remember that almost no one meets minimum qualifications from birth. You move into becoming an accredited investor by making profitable investments and growing your net worth or earning more. So just because you aren’t an accredited investor now doesn’t mean you can’t be in the future. In the meantime, there are hundreds of ways to invest in real estate that don’t necessitate you being an accredited investor. Contact American Real Estate Investments to discover the vast array of opportunities open to you, such as turnkey rentals and vacation rentals.

If you are an accredited investor and would like to learn more about American Real Estate Investment’s private investment opportunities, please get in touch. There are passive investment opportunities that can earn you double-digit, fixed returns. If you’re unsure about your status as an accredited investor, please call. Our experienced representatives can guide you through our screening process so you can better evaluate all your options.