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How to Become an Accredited Investor: Step by Step

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Accredited investors have access to investment opportunities that are not available to all real estate investors. Although the risk involved with such investments is higher, it can also mean higher rewards. Experienced investors may find these opportunities attractive.

However, some investors do not know what having an accredited investor status means. An accredited investor may be able to invest in companies that are in their earlier stages. They can invest directly in these during concept research, development research, and product development.

If an accredited investor meets certain financial criteria, they may be given privileged access. They may also invest through hedge funds, private equity vehicles, and venture capital firms.

The point of having this criteria, or threshold, is to protect investors who do not have a financial cushion to fall back on. These investments are limited to accredited investors because they have both a financial cushion in case the investment fails and enough investment experience to know what they are doing. [1]

Here we will be taking a closer look at what it means to have an accredited investor status, as well as its benefits, and disadvantages. We will also explore how someone can become an accredited investor.

What is an Accredited Investor?

According to Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D), an accredited investor is defined by the U.S. Securities and Exchange Commission (SEC) as a natural person with income that exceeds $200,000 in each of the two most recent years, with a reasonable expectation of the same level of income in the current year. For spouses, a joint income that exceeds $300,000 is required. [1]

An accredited investor may also be a natural person with an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million. This net worth excludes the value of the person’s primary residence.

Before the passage of the Dodd-Frank Act in 2010, the person’s primary residence was included in the process of determining their net worth. [1]

In 2020, there was an estimated 13,665,474 accredited investor households in the US. It represents approximately 10.6% of all households in the US.

SEC Amendments to the Accredited Investor Definition

On August 26, 2020, the SEC introduced amendments to the definition of accredited investors. Through a press release, the SEC defined accredited investors as investors with certain professional certifications, credentials, and designations, on top of the existing tests for net worth and income. Accredited investors may also be individuals who are knowledgeable employees of a private fund. [1]

The SEC also included other entities such as governmental bodies, Indian tribes, funds, and entities organized under the laws of foreign countries, that “own” investments as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered. [1]

Limited liability companies (LLC) with $5 million in assets may also qualify as accredited investors.

How Do I Calculate My Net Worth?

Determining your net worth is a good way to see if you qualify as an accredited investor. Those who have a net worth that is over $1 million either as an individual or joint with your spouse are considered accredited investors. [2]

Add all your assets and subtract all your liabilities to find your net worth. To qualify as an accredited investor, you have to exclude your primary residence from your calculation of net worth. You also have to exclude your mortgage or loan on said primary residence.

Take note that if the loan on your primary residence is more than its fair market value, then it counts as a liability in your net worth calculation. It will also be considered a liability if the loan amount on your primary residence increases within 60 days of investing. [2]

For investors looking to invest with their spouse, a property does not have to be held jointly in order to count towards net worth.

Alternative investment groups may look for your tax returns, financial statements, and W2 forms, among other documents that show income to calculate your net worth.

How to Become an Accredited Investor

To achieve the accredited investor status, an investor simply needs to reach the net worth and income requirements set by the SEC. By meeting these guidelines, an investor automatically becomes accredited.

There is no accreditation process to go through. There is also no government agency or independent body that exists to give qualified investors accreditation. This means there is no exam or piece of paper to acquire. [1] However, BAM Capital and other Multifamily syndication companies do require a letter from a potential investor’s CPA stating that they are an accredited investor. 

Instead of an accreditation process, the companies that issue unregistered investments and securities are in charge of identifying a potential investor’s qualifications. They need to conduct diligence before making the sale.

Once you have met these guidelines, you can invest in securities that are not registered with the SEC.

Due Diligence for Accredited Investors

There is no institution or agency that specifically confirms an investor’s accreditation. No certifications are issued. However, the SEC requires companies and individuals selling to accredited investors to verify their status. Before the SEC made it a requirement in September 2013, investors can simply check a box that says they are a qualified investor. Needless to say, this is no longer possible. [1]

If an investor thinks they qualify, they can visit a fund and ask about potential investment opportunities. The issuer of securities will provide a questionnaire that will help determine whether they qualify as an “accredited investor”. This questionnaire typically requires the attachment of financial statements and other accounts. This will help the fund verify the ownership of assets. The company will then evaluate a credit report to assess any debts held by the individual.

For those who want to use their annual income as the basis of their qualifications, they will likely have to submit W2 forms, tax returns, and similar documents to prove their wages.

Benefits of Being an Accredited Investor

Being an accredited investor comes with plenty of pros as well as a few cons. The primary benefit is that accredited investors have access to investment opportunities that others with less wealth do  not have access to. This allows them to increase their wealth even further.

The investments that are available to accredited investors often have higher rates of return as well as better diversification. These investments can help accredited investors build wealth within a shorter period of time.

One example of this is hedge funds.  Accredited investors are able to invest in hedge funds because these require high minimum investment amounts. Most accredited investors invest in a hedge fund because despite the higher risks, the potential returns are exceptional. [1]

Investors who are aware of their accredited investor status can take advantage of it by finding higher yield investment opportunities. Accredited investors can also invest in small businesses or businesses that are still in development. [3]

Another benefit of becoming an accredited investor is the ability to diversify your portfolio. Investing in the public markets and relying on it solely can limit your diversification options. But accredited investors can easily diversify their investment portfolio by finding alternative investments and assets.

Disadvantages of Being an Accredited Investor

Being an accredited investor also has a few disadvantages. The main one is that the investment opportunities available to accredited investors are high-risk investments. The idea is that an accredited investor should have more knowledge and experience when it comes to riskier investments, and can therefore make better financial decisions.

Naturally, these riskier investments also come with higher minimum investment amounts. It is not enough to deposit just a few thousand dollars into these investments. Accredited investors usually put in a few hundred thousand or even a few million dollars to participate. The reason only accredited investors are able to access these investments is because they are more likely to survive such an event, because they have a safety net. [1]

An investment advisor would tell you that these unregistered securities available to accredited investors usually have a long capital lock up time. This means your money will be locked up for a much longer time–anywhere from a year to several years. You simply cannot pull that money out any time you want. As an accredited investor, you have to get used to this illiquidity.

Do You Have to Prove You Are an Accredited Investor?

The short answer is yes, potential investors must provide a letter from their Certified Public Accountant. The company, fund, or investment vehicle itself has the burden of providing that an individual is an accredited investor. They will also look for accredited investor requirements to determine the person’s qualifications. [1]

A person who wants to invest in these accredited investments will have to fill out a questionnaire and provide certain documents like financial statements, tax returns, and credit returns to show that they are accredited.

Either way, it is risky to participate in these investments without being an accredited investor because it means you do not have the financial cushion necessary in case the investment does not work out. Lying about being an accredited investor is generally not a good idea.

How Much Can an Accredited Investor Invest?

Accredited investors are typically wealthy individuals. This is why they are able to invest in non-registered investments such as hedge funds, private equity funds, venture capital funds, and angel investments.

There is no particular limit to how much an accredited investor is allowed to invest from their own capital. With that in mind, each fund or deal may have its own limitations on investment amounts that they will accept from a certain investor. [1]

Investment for Accredited Investors: Multifamily Syndication

Accredited investors have access to investments that are not usually available to everyone else. This applies to real estate investments as well. When it comes to multifamily syndication, there are plenty of investments that are only available to accredited investors.

Real estate is a good investment vehicle during times of economic uncertainty because people need a place to live even during a recession. Apartment buildings, condominiums, and other multifamily properties can generate consistent cash flow even during uncertain times. This makes them a great investment vehicle.

However, purchasing real estate also means taking on the responsibilities of a landlord. But with multifamily syndication, that is not the case.

A multifamily syndication is one way for investors to get into real estate investing without taking on any of the usual responsibilities associated with owning and running a multifamily property.

A syndication deal is when multiple investors pool their resources together to purchase a single real estate property. This can be done with any type of real estate property, but multifamily syndication is the most popular because of its strong and reliable cash flow. [4]

Multifamily properties do not have to worry much about vacancies. They can generate income even if one or two units are vacant, unlike single family homes that are unable to do so because there is only one unit available to renters.

In a syndication deal, a syndicator or primary sponsor puts everything together. They locate the investment property, secure the loan, and find passive investors to participate in the deal. These passive investors are accredited investors who want to diversify their portfolio through real estate.

The syndicator not only puts the deal together but also manages the property. This means investors do not have any responsibilities when it comes to actually running the apartment building. They don’t have to deal with tenants, deal with emergencies, handle repairs, etc. This makes multifamily syndication a truly passive investment. [4]

All they have to do is supply a portion of the capital needed to acquire the property. They then earn from the monthly cash flow as well as the equity upon resale.

Work with BAM Capital for Multifamily Syndication

BAM Capital is an Indianapolis-based syndicator with a strong Midwest focus that helps accredited investors invest in real estate. BAM Capital prioritizes B++, A-, and A+ multifamily assets with in-place cash flow and proven upside potential. [5]

BAM Capital is known for its unmatched real estate expertise and transparency, as well as its ability to mitigate investor risk while creating forced appreciation. BAM Capital locates high-quality real estate opportunities and negotiates the purchasing and financing on your behalf. They take care of everything from start to finish, making it a true passive investment. [5]

BAM Capital has a consistent track record that makes them very popular among passive investors. In fact, they currently have $700M AUM and 5,000 units. Accredited investors can schedule a call with BAM Capital and invest today.

 

 

BAM Multifamily Growth & Income Fund III

BAM Capital created this fund in order to yield consistent and reliable cash flow, long-term appreciation, and accelerated tax benefits. The fund aligns with BAM Capital’s demonstrated track record of successful multifamily investing by continuing to implement our signature investment thesis, now in fund format. The fund aims for greater overall returns and lower risk through a multi-asset diversification strategy.

  • Consistent passive income
    Lower-risk assets with in-place cash flows with the ability to distribute preferred return after acquisition.
  • Significant tax benefits
    A cost segregation analysis allows for accelerated deprecation to years of ownership. This large passive loss gets passed onto investors through a K1.
  • Vertically integrated company
    In-house property management and construction allow for predictable cost reduction and value add.

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The contents on this site are for informational and entertainment purposes only and do not constitute financial, investment, or legal advice. BAM Capital cannot guarantee that the information shared on this post or page is appropriate for you and your financial situation. By using this site, you agree to hold BAM Capital and any and all entities related to the writing & publishing including BAM Capital’s parent company harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this site. Always consult your investment advisor, CPA, and other professionals before making an investment. BAM Capital is excited to help you grow your investment assets. Please contact us to see how we can help you.  

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NOTE: we can only accept capital contributions from Accredited Investors. What is an accredited investor? Have earned upward of $200,000 (or more than $300,000 if jointly paired with a spouse) for each of the last two consecutive years & expect to earn the same in the current year. Possess a net worth of more than $1 million (either individually or in partnership with one’s spouse), not including the value of their primary residence.
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What is an accredited investor? Have earned upward of $200,000 (or more than $300,000 if jointly paired with a spouse) for each of the last two consecutive years & expect to earn the same in the current year. Possess a net worth of more than $1 million (either individually or in partnership with one’s spouse), not including the value of their primary residence.

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