You’ve heard that Fund That Flip requires passive investors (lenders) to be accredited — but you’re not sure what an accredited investor is. First, this is not a definition or standard set by Fund That Flip. An accredited investor is an individual or entity that meets certain criteria set forth by the U.S. Securities and Exchange Commission (SEC). In order to be considered an accredited investor, an individual must have:
- A net worth of at least $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person's primary residence), or
- Earned an income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, or
- A Series 7, 65, or 82 license in good standing.
Additionally, an accredited investor can also be an entity, such as a corporation, partnership, or trust with assets exceeding $5 million.
Accredited investors are allowed to participate in certain types of investments not available to the general public. They’re also allowed to purchase unregistered securities.
Why Does the SEC Differentiate Between Accredited and Non-Accredited Investors?
The key difference between accredited and non-accredited investors is that accredited investors are considered to be more financially savvy and have a greater ability to take on risk, due to their higher net worth and income.
Therefore, accredited investors are allowed to participate in certain types of investments not available to the general public, such as hedge funds, private equity, and venture capital — sometimes considered more volatile. They’re also allowed to purchase unregistered securities and are subject to different rules and regulations when it comes to investing. Accredited investors are also exempt from filing requirements that apply to other investors, as the SEC believes these exemptions provide accredited investors with greater flexibility and opportunity when it comes to investing.
In contrast, non-accredited investors are generally only able to invest in more traditional options such as stocks, bonds, and mutual funds. While this may seem that certain opportunities are being gate-kept, remember that accredited investors take on more risk when they invest in these potentially more volatile options. Essentially, the SEC’s requirements and definitions are designed to protect non-accredited investors from taking on risk they may not understand or be able to afford, as well as promote fair and transparent markets.
How Do I Become an Accredited Real Estate Investor?
Unfortunately, as outlined above, you can’t just become an accredited investor, you must meet certain net worth, income, or licensing requirements. However, you can work to eventually get access to these types of investments (and increase your net worth). Here are some ideas:
- First, talk to a financial advisor or planner to help you outline your goals and develop a plan for how you’ll get there.
- Get educated on investing in real estate! Sites and forums like BiggerPockets, Property Nirvana, and YieldTalk provide great investment information and networking opportunities. You might even find some deals!
- Learn different investment strategies — there are many different ways to passively and actively invest in real estate.
- Network locally. You may find someone looking for private investors or other investing opportunities.
- Make sure you get a contract for any investment agreement. We believe in the power of relationships and handshake agreements, but we still get a term sheet at the end of the day. It protects everyone involved.
The more you know, the more you can grow (your net worth).
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