🤔 What is An Accredited Investor, How Can You Become One ✓, and why are they so important🔎?
Where It All Begins
Apartment syndications are considered securities, which means they are governed by federal and state securities laws. Securities include promissory notes or “investment contracts” between a general partner and the passive investors. The Securities Act of 1933 requires that the sale of securities must be pre-approved and registered by the Securities and Exchange Commission (SEC) unless it falls under an exemption.
There are numerous federal and state exemptions with the most popular exemption in apartment syndication being Rule 506 (b). Rule 506 (b) allows general partners to raise an unlimited amount of money from an unlimited number of Accredited Investors and up to 35 Sophisticated Investors, however, the general partners can’t advertise the syndication deal to get passive investors. General partners must rely on and prove previously established relationships to raise capital for their deals.
The second common exemption is Rule 506 (c), which allows general partners to advertise their syndication deals to potential passive investors, however, they may only raise capital from accredited investors.
Accredited Investors Vs Sophisticated Investor
Below we break down the two exemptions that apartment syndication deals usually fall under and compare the differences between accredited and sophisticated investors.
Accredited Investor
A single person who brings home a net income of $200,000 per year for the two most recent years
A couple who has a joint net income of $300,000 per year for the two most recent years
An individual or couple who have a net worth of $1,000,000 or more, not including their primary residence
Sophisticated Investor
A sophisticated investor is someone who has the necessary real estate knowledge and experience in both financial and business matters, to be able to properly evaluate all risks associated with the potential apartment syndication deal.
How to Become An Accredited Investor
The good news is that there is no class you have to take, no certification you have to obtain, and no fee that you have to pay to become an accredited investor. To verify that you are an accredited investor you just need to verify that you meet one of the three criteria above.
If you are single, make sure that you had a net income of $200,000 or more for the most recent two years, and if you are using joint income, then double-check that your combined net income is $300,000 or more for the most recent two years.
To qualify as an accredited investor based on your net worth, you will need to calculate your net worth, making sure to exclude your primary residence. This means that you add up all your other assets like your investments, bank accounts, vacation homes, etc. and then subtract any liabilities like loans, home equity lines of credit, etc. The remaining value will be your net worth.
For example:
Mark and Mikayla have a joint net income of $250,000 per year, so they don’t qualify as accredited investors based on their income, however, they think that they have enough in assets to qualify them as accredited investors.
Mark and Mikayla have a triplex that is valued at $400,000, which they owe $100,000 on, they have a single-family rental valued at $200,000, which they owe $50,000 on, they have $150,000 in their savings account and $500,000 in their retirement accounts.
Their net worth is $400,000 - $100,000 + $200,000 - $50,000 + $150,000 + $500,000 = $1.1 million. This qualifies them as accredited investors.
Why Is It a Big Deal to Be An Accredited Investor?
Even though you can invest in apartment syndication deals as a sophisticated investor, you can be severely limited by the syndication options that are available to you. As we mentioned earlier, both Rule 506 (b) and Rule 506 (c) allow for accredited investors to be passive investors in syndication deals that fall under these exemptions. However, sophisticated investors may only invest in syndications that fall under Rule 506 (b), which prohibits advertising the syndication deal. This limits the number of potential deals that sophisticated investors come across and can invest in, and some crowdfunding investment platforms only allow accredited investors to invest in their deals.
Accredited investors are viewed by many syndicators and general partners as more reliable investors, as their income and/or net worth provides them a cushion against any risks that may be associated with a syndication deal. Meanwhile a sophisticated investor may invest less frequently and also have larger portfolio risk to any one deal. You can avoid a bad deal and minimize your risk by working with an experienced syndicator.
At Dwellynn, the team is an experienced syndication group that will only pursue the best of the best opportunities and take every available measure to protect your investment.