Other Investments, Real Estate

How to Become an Accredited Investor

One lesser known fact in the investment world is that there are certain investments that are only available to certain types of people. These people are known as “accredited investors.” Getting access to these investments is the first major step towards achieving true financial freedom. Read on to find out how to become an accredited investor.

SHARE

Share On Facebook
Share On Linkedin
Share On Twitter

Disclaimer: Sharon Winsmith is not a financial advisor and is not engaged in the business of providing financial investment advice. The information contained on this page includes details regarding Sharon Winsmith’s personal investments. Nothing contained on this page or elsewhere on this website constitutes investment advice. We encourage you to do your own independent research and consult with your personal advisors before making any investment decisions.

One lesser known fact in the investment world is that there are certain investments that are only available to certain types of people. As a general rule, these investments are the best types of investments out there and are restricted to what is called accredited investors.

If you want to be in a situation where you can build considerable wealth, you need to have access to these exclusive investments. Becoming an accredited investor is the first stepping stone to achieving financial freedom.

Read more to find out how you can become an accredited investor.

 

Why These Investments are Restricted to Accredited Investors

The short answer is that the government, in its infinite wisdom, thinks you don’t have the necessary knowledge to make these types of investments unless you have a certain level of money. This line of thinking is despicable to say the least.

The Securities and Exchange Commission (SEC) is the agency that regulates security offerings. I will avoid going on a rant about how bad the SEC rules are. What you need to know for these purposes is that the SEC, a governmental agency, dictates the rules around who is considered an accredited investor and what types of investments have to be limited to accredited investors.

Why You Should Want to Be An Accredited Investor

Becoming an accredited investor is the golden ticket to investing and building wealth. It will open up opportunities to invest in assets that have a number of different benefits, including:

1. Large Scale Investments → I can’t afford to go out and buy an apartment building in Atlanta. However, I can invest in a fund that buys an apartment building in Atlanta. This allows me to invest in larger assets that are otherwise out of reach for the individual investor by themselves.

2. Higher Returns → Because the scale of investments can be much larger, the returns from these types of investments is typically much higher than you could ever achieve on your own (or at least should be if you are working with a good investment manager).

3. Ability to Invest Passively → Nothing beats mailbox money. Instead of managing a bunch of rental properties, I can invest in a fund and let the fund manager do it. Yes I will have to pay the fund manager fees that would reduce the profits from what they would have been if I did it myself, but I am more than happy to pay reasonable fees if it means I can get my checks each month without having to lift a finger.

4. Leverage Other People’s Connections → I would have loved to have been besties with Jeff Bezos to get in on some shares of Amazon before the company went public. I would be retired in Tahiti if that had been the case. But in real life those types of opportunities just never seem to show up on my front door. So instead, I invest with fund managers who have access to all kinds of off-market deals that I would never even know about.

5. Access to Debt → A bank might not be willing to lend me money to go out and buy a $40M building. However, they are willing to lend to a pool of investors that is managed by a reputable fund manager with a long-standing history of operation in the industry.

What is an Accredited Investor?

Each country has its own rules for who can be considered an “accredited investor.” For our purposes, I am only going to cover the U.S. accredited investor rules. However, if you live outside the U.S., I encourage you to consult your own country’s requirements.

To be considered an accredited investor, you must meet one of the following tests:

  • Person with pre-tax income of more than $200,000 in the past 2 years (if single) or married couple with pre-tax income of more than $300,000 in the past 2 years (if married) and a reasonable expectation of having that same income level in the current year. OR
  • Person or married couple with a net worth of more than $1M.

For purposes of computing your net worth in the second threshold test, you may not include the value of your personal residence.

There are other types of individuals and entities that may qualify as an accredited investor that I have not covered as they are largely irrelevant to my audience. An example of people who can be accredited investors even if they do not meet the definition above includes a financial advisor or broker who holds certain licenses.

What is a Qualified Client or Qualified Purchaser?

You may have also heard the terms “qualified purchaser” or “qualified client.” Our friends at the SEC and some state regulators have certain rules around when fees can be charged by advisors and heightened reporting requirements that apply in some cases when you engage an advisor to manage your investments. To avoid these rules, some advisors require their customers to be qualified clients or qualified purchasers.

A qualified client includes:

  • Person with at least $1M in assets under management with the advisor after entering into the contract with the advisor. OR
  • Person or married couple with a net worth of at least $2.1M (excluding the value of their personal residence) before entering into the contract with the advisor. OR
  • Person who is an officer or director of the advisor or employee who is involved in investment activities for at least 1 year with the advisor. OR
    Person who satisfies the definition of a qualified purchaser.

To be a qualified purchaser, you typically need to have at least $5M in investments, not including your primary residence.

Types of Investments Available to Only Accredited Investors

When they say you have to have money to make money, this becomes very true when you look at the world of investments that are restricted to only accredited investors.

There may be situations where a fund or online investment platform offers investments to both accredited and non-accredited investors. However, I usually avoid these at all costs. In my opinion, the best fund managers require all investors to be accredited. This is because it makes their lives a lot easier and can limit the risk they incur under the SEC rules.

Check out My Investments for more information on the specific types of investments I make.

Here are some examples of the types of investments that are typically limited to only accredited investors.

Real Estate Syndications

The best types of investments out there for accredited investors are real estate syndications. This is because the returns are good and the investments, if done properly, should provide tax benefits. The key here is making sure you invest with a good manager.

There are some online platforms with access to real estate investments, such as CrowdStreet, that have gained popularity in recent years. However, I still prefer the personal touch and only invest with funds where I have access to and trust the management team.

RELATED: Check out the Real Estate Investment Funds page to see funds that I invest with.

Non-Real Estate Syndications

There are also similarly structured syndications that are for investments in non-real estate assets. Examples of these might be credit funds or debt funds where investors pool money to lend out to borrowers.

Note that these types of funds often do not provide the same tax advantages that real estate syndications do. Credit funds also don’t typically have high returns unless the fund lends money to more risky borrowers or individuals or businesses who do not otherwise have easy access to debt.

Pre-IPO or Angel Investments

As a general rule, investments in companies before they go public are limited to accredited investors only. These investments can be made through funds which allow you to buy shares in private companies before the company goes public. Accredited investors can also acquire shares of pre-IPO companies through certain online platforms like EquityZen.

In many cases, angel investments can be made through networks that provide access to companies in the startup stage. You will be required to prove that you are an accredited investor before being allowed to join the network and view the list of companies seeking funding. Angel investing is also often done directly by friends and family of the company’s founders.

There are some exceptions to this rule in some cases that allow non-accredited investors to make some small investments in startup companies. StartEngine is one example of a platform open to both accredited and non-accredited investors (subject to certain limitations on the amount they can invest). I avoid investing in these types of offerings for a number of different reasons.

RELATED: Check out the Pre-IPO Investments page to see pre-IPO companies that I have invested in.

Private Equity Funds

Private equity funds make large investments in private companies. The management team for the fund will often take an active role in managing the underlying companies the fund invests in.

Hedge Funds

Hedge funds invest in a bunch of different types of liquid assets. The types of investments can range from buying debt instruments to small ownership interests in private or public companies. The managers of these funds generally have a great deal of discretion in the types of investments that can be made with the investors’ money.

Venture Capital 

Venture capital is similar to private equity in a lot of ways. However, the investments are typically made in companies in the startup stage. The investments are expected to earn higher than average returns but are typically considered to be quite risky as the company does not have a long track record.

Certain Types of Investments in Cryptocurrency

Anyone can go out and buy Bitcoin and Etherum. However, there are all different types and usages of cryptocurrencies.

One type of cryptocurrency may involve buying tokens or crypto that really operates more like owning shares in a company rather than owning a currency. So instead of issuing shares of stock in the traditional sense that we generally think of, the company issues crypto or tokens.

In some cases, investors who buy the crypto are allowed to participate in the future growth of the company earning dividends throughout the holding period. However, this is not always the case.

These types of offerings would generally be subject to the SEC rules and are consequently often limited to just accredited investors.

Proving Accredited Investor Status

The way you prove accredited investor status will differ depending on the type of investment you are making and the investment manager’s requirements. These are some of the ways I have seen investment managers require you to verify that you are in fact an accredited investor: 

  • Sign a document attesting that you are an accredited investor (this one doesn’t require you to provide any documents or have an external review)
  • Provide tax returns or bank statements to show you satisfy the relevant thresholds 
  • Get an accredited investor certification letter from a CPA or attorney 
  • Use an external service that verifies you are an accredited investor such as VerifyInvestor.com

If the manager requires you to use an external service or get a professional letter, there will be some cost involved. I generally find this asinine and have passed on making investments in the past because I didn’t want to go through these ridiculous hoops. With that said, if it is a great investment, it might be worth the effort and additional costs.

How to Become an Accredited Investor

This might seem obvious, but you should focus on investing your money in assets that will help you get to the thresholds for being an accredited investor as quickly as possible. Perhaps the easiest way to approach this is to start by talking about what you don’t want to do.

4 Things NOT to Do if You Want to Become an Accredited Investor

1. Don’t Buy a Personal Residence

DO NOT BUY A HOME UNTIL YOU REACH ACCREDITED INVESTOR STATUS. Let me repeat that again: do not buy a home until you are an accredited investor. If you own a home now and are still not an accredited investor, I would sell it or convert the home into a rental property now.

Not only should you not buy a home, you should never let buying a home kick you out from being an accredited investor.

Your home is not an asset. I have written and spoken on this point extensively as have others throughout the finance community. Robert Kiyosaki has also written about this many times and says the idea that your home is an asset is a complete scam. I agree.

Even if you still aren’t convinced that your home is not an asset, the U.S. government doesn’t think it is. This is why you can’t include the value of a personal residence in the calculation of your net worth for purposes of determining if you satisfy the accredited investor threshold.

You should note here that this only refers to homes you will live in as your personal residence. This does not include rental properties held for investment purposes.

2. Don’t Pay Yourself a High Salary to Meet the Income Requirements

Salary income is just about the worst type of income you can earn from a tax perspective. If you are a business owner, don’t pay yourself a higher salary to make it look like you are an accredited investor because this is going to hurt you on the tax side.

Rather, find other ways to achieve accredited investor status that won’t involve you writing a bigger check to Uncle Sam every year.

3. Don’t Rush Into Getting Married if It Will Prevent You from Meeting the Thresholds

Before you race off to the altar, make sure that isn’t going to kick you out of being an accredited investor. If you have a relationship where one couple is a high earner and the other does not make much money, this might impact you passing the income test. This is a more common fact pattern than you might think.

For example, Pat and Tom are in a relationship and they have a combined net worth of $500,000. Pat makes $230,000 a year and Tom makes $40,000 a year. If Pat is single, she can qualify as an accredited investor because she makes more than $200,000 a year (assuming she has done so for several years). However, if Tom and Pat are married, neither will be an accredited investor because they do not have a combined income of more than $300,000.

4. Invest in Assets that are Too Risky or Get-Rich-Quick Schemes

Don’t make crazy investments to try to grow your net worth overnight. You need to remain disciplined and only invest in assets that have the ability to provide you with reasonable long-term growth.

A mantra I always remind myself when it comes to making money is → if it were that easy to make money by doing something, everyone else would have already done it.

4 Things You SHOULD Do if You Want to Become an Accredited Investor

Now let’s talk about what you should do if you want to become an accredited investor.

1. Invest in Assets with Reasonable Returns

I always stay away from savings accounts, CDs, bonds, or other assets that have ridiculously low returns. To me, there are just better uses of my money. If you think investing in bonds is going to help you reach accredited investor status, I recommend you run the numbers on how many years it would take of compounding to reach your goal.

You want to invest in assets that have reasonable returns that aren’t too risky. I am willing to stomach more risk, so I never invest in anything with a return lower than 10%.

That isn’t to say you should only invest in assets with a return of at least 10%. You need to figure out what works best for you and your goals and how much risk you are willing and can afford to take on. Before you reach accredited investor status, it might be wise to take on less risk because the failure of one investment might be disastrous to your overall net worth.

2. Invest for the Long-Term

Whenever someone asks me “should I invest in this or that,” my response is always the same. Can you leave the money in that investment for at least 10 years and never touch it? If the answer is no, you probably aren’t ready to invest in that thing.

I typically never make an investment expecting short-term results. In my mind, investments that promise short-term results are either:

  • Extremely risky and limited to accredited investors only. OR
  • A scam.

When I do make investments that I expect to appreciate in the short-term, I fully recognize the risk I am taking. Examples of these types of investments are pre-IPO investments. I am fully aware that before I make an investment in a pre-IPO company, I could lose all of my money.

When I think about investing for the long-term, I think about investing in stocks and real estate. Historical performance and conventional wisdom generally leads one to think these two types of investments are on the safer side (if done properly). If I was just starting out and was trying to start saving money and building wealth, my first passive investments would probably be in these two asset classes.

3. Don’t Put All Your Eggs in One Basket

Never make the mistake of putting all your money in one type of investment. I can’t tell you how many times I have clients come to me with 100% of their investments in the stock market. I cringe every time I see it because of the risk in lack of diversification.

There are still a lot of different types of investments available to non-accredited investors. Examples include:

  • Stock market
  • Real estate rental properties
  • Cryptocurrency (be careful here with risk and make sure you are investing for long-term gains)
  • Businesses (the king of all investments)

Because you are not an accredited investor, if you invest in real estate you will have to own and manage the properties yourself unless you hire a property manager. This is probably worth the time and effort for a few years in order to open up access to the world of real estate investment funds where you can stop plunging toilets and dealing with tenants.

4. Start or Buy a Business

There is no way around the fact that all of my clients who have amassed significant sums of wealth did so by either starting a business from scratch or buying a business they were able to grow themselves. I am a firm believer that businesses are the king of all investments.

It might be a difficult few years while you get the business off its feet. However, once things are up and running, a well-run business can be a cash cow. This could be your quickest path to reaching accredited investor status if you pick the right business.

Make Your Own Goal for How You Will Become an Accredited Investor

Start with where you are today and how much more money you need to satisfy one of the threshold tests for becoming an accredited investor. Once you figure out how far you have to go, it is time to start thinking about which investments will help you get there.

Always take into account the risk you are willing to take on with each investment and make sure you do your own research and consult with the necessary advisors before making any investments. You can build a model that will show you how the returns from each different type of investment can compound and help you reach your goals over time.

The important thing is that you get started now! Remember, every day you wait to start investing is a day’s worth of compounding you are missing out on!

 Related Posts