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Do Accredited Investors Get Better Returns?

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Accredited investors are experienced investors with a high net worth. For this reason, they have access to certain investment opportunities that are not available to others. They can invest in hedge funds, venture capital funds, private equity funds, and real estate syndication deals, among others.

With that said, some people wonder if being an accredited investor and accessing these investments is actually worth it. Does being an accredited investor automatically come with greater returns? Will you earn more than regular people on the street? This is what we are going to explore today.

Accredited investors are recognized by the US Securities and Exchange Commission (SEC) for having enough experience and a level of sophistication needed to invest in somewhat riskier investments. These investments are limited for a reason. Some of them are riskier than your usual stock market investments. Accredited investors understand the risks associated with these financial investments. And because they have a larger annual income, they have a larger financial safety net that will protect them in case the investments fall through.

Accredited investors enjoy flexibility when it comes to building their investment portfolio. In fact, most accredited investments don’t need to be registered with authorities in the financial sector. Accredited investors can explore different investment opportunities and asset classes to diversify their portfolio and build their wealth.

How Does the US Securities and Exchange Commission Define an Accredited Investor?

Before we talk about the potential returns for accredited investors, let us have a quick look at what an accredited investor is, as defined by the SEC. According to the SEC, an accredited investor is someone who has an income over $200,000 in each of the two most recent years, with a reasonable expectation that they will earn the same level of income in the current year. [1]

For spouses, they must have a joint income that exceeds $300,000. This definition is dictated in Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D).

Determining a person’s net worth is another way to see if they qualify as an accredited investor. Based on the net worth test, a person is an accredited investor if their net worth exceeds $1 million. This can be met as an individual, with a spouse, or with a spousal equivalent. [1]

To calculate your net worth, simply add up all your assets and subtract all liabilities. Keep in mind that you have to exclude the value of your primary residence for this calculation.

It is worth noting that there is no official accreditation process for accredited investors. The burden of proving an investor’s qualifications falls on the investment vehicle. For this, they would often require investors to fill out a form and submit certain documents such as tax returns, credit reports, and financial statements.

Some investments are open to accredited investors and sophisticated investors alike. A sophisticated investor is an individual with sufficient capital, experience, and net worth to engage in more advanced types of investment opportunities. [2]

According to the JOBS act in 2016, an investment vehicle can be made using Regulation D 506(b) which allows for up to 35 non-accredited investors to participate as long as they are considered sophisticated investors. [2]

Do Accredited Investors Get Better ROI Than People Off The Street?

Accredited investors can put money into exclusive investments that have the potential for higher returns. Technically, this does not automatically translate into greater ROI because every investment is different. There are a lot of different factors that determine whether or not a financial investment will be profitable. Even hedge funds lose money sometimes.

This simply means that even accredited investors have no guarantee that their investment will yield a high return. But with that said, these investments do offer greater potential returns. [2]

Just like non-accredited investors, accredited investors still need to perform their due diligence before investing in these alternative investment opportunities. While building your investment portfolio, you need to identify your investment objectives and make sure you are working towards them.

Returns are not guaranteed, no matter what you invest in. In fact, these accredited investments are generally riskier, which means the chances of losing your investment are higher. As an accredited investor, you have the experience and the knowledge needed to assess whether it is worth it. At the end of the day, you make your own investment decisions.

What Investments are Available to Accredited Investors?

Since ROI is tied to the type of investments you choose as an accredited investor, we need to talk about some of the alternative investments that are available to you.

Private placements, online investment platforms, venture capital, alternative assets, etc.—these are some of the things you want to familiarize yourself with if you want to make the most out of your accredited investor status.

With a high net worth and annual income, you can try out investment opportunities that are relatively riskier. You may become an angel investor for a small company or a startup. You may even look into the world of real estate investing, to see properties that are exclusively available to accredited investors.

As high net worth individuals (HNWIs), accredited investors typically aim to secure, maintain, and grow their wealth. By doing your due diligence and learning all about the various accredited investor opportunities, this is possible. Alternative investments are heavily favored by investors who have an aggressive investment approach, particularly those who enjoy a bit more risk in exchange for higher returns.

Hedge Funds

Hedge funds are actively managed investment pools that typically use non-traditional asset classes or investment strategies. The manager of an investment company or fund will usually set aside a portion of their available assets as a hedged bet. They will bet against the fund’s primary focus to offset any losses. [3]

For example, a fund manager for a cyclical sector may devote a portion of the assets to stocks in a non-cyclical sector. This way, if the economy tanks, their losses are offset.

Hedge funds are somewhat similar to mutual funds because they are professionally managed by career investors. However, hedge funds are not strictly regulated by the SEC, which means they are subject to less scrutiny. These hedge funds can apply to different investments such as shorts, options, and derivatives. [4]

Hedge funds require a high minimum investment. This is why most hedge funds only allow accredited investors to invest. These hedge funds are not structured to accept non-accredited investors. [3]

To participate in a hedge fund, an accredited investor simply has to select a hedge fund manager based on their preferred investment approach. Some hedge fund managers use riskier strategies like using borrowed money to buy more of an asset and multiply their potential returns. However, this also multiplies their potential losses.

Choose a hedge fund manager who has the same investment philosophy as you. Most hedge fund managers will charge a fee of 1% to 2% of the assets, plus 20% of the profits as their “performance fee”.

Venture Capital

Venture capital is a form of equity financing. This is where venture capitalists and angel investors provide funding for early stage companies, small businesses, and promising startups. This is done in exchange for a share of company ownership. Venture capital funds can be used by the startup or small business to grow, expand, or even try new product ideas. [4]

For the accredited investor, this is a risky venture. There is no way to know if a business is going to take off or not. But this can lead to incredible ROIs because investors enjoy much larger returns when the company does prove successful.

Accredited investors earn back their investment and a significant profit based on the percentage of the company that they own.

REITs

Some accredited investors go into real estate investing because they know how lucrative it can be. If you want long term passive income investments, real estate investing is the way to go. There are plenty of ways to participate in it.

Some real estate investors go for commercial real estate, while others purchase residential real estate. Some people acquire real estate assets, flip them, and then resell for a profit.

For accredited investors, there are even more options. A real estate investment trust or REIT is a good example of a real estate investing strategy that is more suitable for accredited investors. REITs are companies that pool funds together and invest in various real estate investments. [4]

With REITs, accredited investors do not invest in real estate directly, but rather in the company itself. REITs own many different real estate assets in the market. This means investors don’t get to choose what properties to invest in. But generally speaking, REITs will invest in apartment complexes, condominiums, warehouses, hospitals, and commercial real estate. [4]

But if you want the ability to choose a real estate property to invest in, multifamily syndication is a good alternative.

Multifamily Real Estate Syndication

Real estate syndication is somewhat similar to REITs because it also involves pooling resources to purchase real estate investments. A syndication deal is when multiple investors pool their resources together to buy a single real estate property. This deal is put together by a syndicator, also known as the general sponsor. [4]

The syndicator locates a real estate property, puts the deal together, secures the loan, and looks for investors, also known as Limited Partners (LPs), who will participate. These investors will provide most of the capital needed to acquire the property. [4]

The difference with REITs is that you can choose what syndication deals to participate in. If you believe in the real estate property being syndicated, you can join as one of the passive investors.

Real estate syndication can be done with any type of real estate, but multifamily syndication is the most popular kind because multifamily properties generate a lot of consistent income.

Multifamily properties such as condominiums and apartment complexes have several units, meaning vacancies are not a problem. These properties generate consistent cash flow through monthly rental income. Additionally, these large properties are generally harder to obtain as a lone investor, which is why syndication is an ideal setup.

Investors can participate in multifamily real estate investing with a much lower minimum investment.

The syndicator will also be in charge of property management, meaning passive investors do not have to worry about becoming a landlord. If you are an accredited investor and you want to avoid the hassle of actually owning and managing a property, real estate syndication is the solution for you. [5]

Accredited investors do not have to collect rental income, deal with tenants, handle emergencies, spend money on repairs, etc. Either the syndicator will hire a third party property manager to do this or they will handle it themselves. [4]

Each party in the multifamily syndication investment owns a percentage of the property. In some cases, ownership is split equally among all of the partners. Sometimes the syndicator has a larger percentage of the equity.

The cash flow is generally split amongst the participants. This means investors receive passive income from rents, and the eventual building sales. This is based on what percentage of the property they own.

Work with BAM Capital for Multifamily Syndication

If you want to invest in multifamily apartment complexes without the headache of running them yourself, you should work with BAM Capital.

This Indianapolis-based syndicator has a strong Midwest focus, prioritizing multifamily real estate properties that are Class A, A-, and B++. BAM Capital uses an award-winning multifamily investment strategy that allows investors to grow their wealth through syndication. [6]

BAM Capital mitigates investor risk and uses a vertical integration strategy to create forced appreciation. They have a consistent track record of providing a safe and passive investment for their investors.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. Their vertical integration strategy has worked wonders for the company so far. In fact, BAM Capital currently has $700 million AUM and 5,000 units. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions

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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