In the world of real estate investing, the term “accredited investor” often comes up. Accredited investors enjoy certain advantages and access to exclusive investment opportunities. But what if you don’t meet the requirements to be an accredited investor? Does that mean your path to wealth-building in real estate is blocked?
In this blog post, we will explore how you can still build wealth with multifamily real estate, even if you are not accredited.
Understanding Accredited Investors
Before we delve into alternative avenues for wealth creation, let’s briefly define what an accredited investor is. In the United States, the Securities and Exchange Commission (SEC) has set specific criteria to determine accredited investor status. Generally, an accredited investor is an individual or entity that meets certain income or net worth thresholds. These requirements are in place to ensure that individuals who participate in riskier investment opportunities have significant financial resources to absorb any potential loss.
So who qualifies as an Accredited Investor?
- Your individual income has been $200,000+ in the past two years and you have a reasonable expectation of reaching the same income level this year ($300,000+ jointly with spouse).
- Your individual (or with spouse) net worth exceeds $1,000,000 or you have assets under management of $1,000,000+ excluding your primary residence.
- You are a holder in good standing of the Series 7, Series 65, or Series 82 licenses professional certifications, designations or credentials
- You are a “knowledgeable employee” of a fund with respect to private investments
Not Accredited? Here are three options for you!
- Investing Passively in a Specific Type of Offering (506b):
One option for non-accredited investors is to invest passively in a specific type of offering, specifically under Regulation D, Rule 506(b). To qualify as an accredited investor, individuals must meet certain income or net worth requirements. But with the 506(b) option, non-accredited investors can invest in private securities offerings without direct involvement in the management of the investment. However, they need to be “sophisticated” investors OR have a representative (such as a CPA or financial advisor), who is capable of evaluating the financial merits of an investment offering, to assist them. This option often requires networking and finding investment opportunities by building connections within the investment community or through referrals to find experienced sponsors who syndicate large multifamily offerings.
- Active Focus on Acquiring a Microfamily Property (3-10 Units):
Another option for non-accredited investors is to take an active role in real estate investing by acquiring a small multifamily property consisting of 3-10 units either on their own or as a Joint Venture with another investor-partner. This option allows investors to directly control and manage their investment. By acquiring a microfamily property, investors can benefit from rental income, potential property appreciation, and the opportunity to leverage their investment. Compared to passive investments, this option requires more hands-on involvement, including property management, tenant selection, and ongoing maintenance. It also provides the potential for greater control over the investment and higher returns.
- House-Hack a 2-4 Unit Property:
House-hacking refers to the strategy of living in one unit of a multifamily property while renting out the other units to tenants. Accredited investors can consider house-hacking a 2-4 unit property as a way to leverage their investment while reducing their living expenses. With this option, investors can enjoy the benefits of homeownership, such as building equity and taking advantage of tax deductions, while generating rental income from the other units. I always recommend going with at least 3 units, because with only 2, you are fully responsible for the entire PITI (mortgage) if your tenant is delinquent or the unit becomes vacant! House-hacking typically allows for a lower down payment requirement compared to traditional investment properties (think 3.5% down instead of 20% down). The investor can then control a large asset with a limited about of capital! However, it also requires the investor to live in the same building as their tenants, which can have its pros and cons.
In summary, these three options provide non-accredited investors with different approaches to real estate investment. Investing passively in private securities offerings allows for diversification and access to specialized investments but requires networking and the assistance of qualified professionals. Acquiring a small multifamily property offers greater control and potential for higher returns but involves active management and greater responsibilities. House-hacking provides a way to leverage an investment with much lower down payment requirements while reducing living expenses, but it requires living in close proximity to tenants. Consideration of personal goals, risk tolerance, and available resources is important in choosing the most suitable option. Consulting with a financial advisor or real estate professional can also provide valuable guidance in making informed investment decisions.