WHAT IS AN ACCREDITED INVESTOR?
An accredited investor is the term used by the SEC to refer to a business entity or individual who is financially sophisticated enough to require a reduction in regulatory disclosure filings protection. It includes institutions or people such as banks, brokers, trusts, insurance companies, and HNWIs.
This special authoritative sanctioning means they meet crucial standard criteria. Accredited investors are the most popular choice to purchase securities outside of the regulatory authorities registration, such as the SEC. Many companies offer securities to accredited investors directly because the capital raising procedure involves an expensive and complicated exercise involving regulatory filings. Costs are greatly reduced when companies are exempted from registering securities with the SEC. However, the participants have to ensure their venture is financially stable, so the private placement transaction is preferably with an accredited investor.
How Do You Become an Accredited Investor?
Obviously, being an accredited investor opens up more transaction opportunities than non-accredited investors. The SEC permits private funds and companies to jump over certain investment registration procedures as long as they sell assets to an accredited investor. In turn, the accredited investor can put the money to use in the lucrative financial avenues of funds, private equities, venture capital, and real estate. They are trusted to know where to place the capital, and which investment opportunities are currently the most viable.
There is no actual process involved in becoming an accredited investor. The company issuing the unregistered securities will determine where a potential investor has adequate credentials. This due diligence can take many forms before the investor’s accreditation status is verified.
Who Qualifies as an Accredited Investor?
An accredited investor is defined in two ways: Income and net worth.
- An individual whose income exceeds $200,000, or joint income with a spouse of $300,00, for the last 2 years, with the expectation of the same for the forthcoming year.
- An individual whose net worth or joint net worth with spouse exceeds $1 million, excluding the valuation of their primary residence, at the time of purchase. This is a recent addition to the criteria needed to qualify as an accredited investor (2010).
Other provisions are in place according to the partnership, organization, corporation, or trust. Additionally, equity owners, company directors, and financial institutions have several screening processes and formulas when seeking accredited investor designation.
If you as an individual, or when combined with a spouse, meet the criteria of $200,000 and $300,000 in earnings for the past 2 years respectively, then you automatically qualify as an accredited investor. A net worth of over $1 million minus the valuation of the primary residence is another way qualification can be gauged. Although no formal agency confirms an investor’s accreditation, the issuing company will perform due diligence to ascertain accredited status.
Types of Real Estate Investments that Accredited Investors Favor
Accredited investors operate in the big leagues of real estate investing. As high-net-worth parties, they can access investments on a complex and more high-risk level. What are the best types of real estate investment opportunities for accredited investors?
The wide range of real estate investments can include part-ownership of shopping mall mortgages or even fix and flip housing projects on a larger scale. A mix of property types and investment risk profiles can be seen here at a glance:
- Multi-family property development
- Industrial property
- Retail property
Multi-family property development projects offer the greatest amount of stability if the developer is trustworthy and competent. Industrial properties have always been a staple in any accredited investor’s real estate portfolio, and retail property offers stable returns when the economy is steady. Office properties offer variable returns as it is linked to the economy. It rises in valuation and investment return when the economy is strong.
A strong renter culture has made multi-family and apartment property development a key component of any accredited investor’s strategy. Industrial property is a solid passive real estate investment opportunity. As can be seen from the latest news that Amazon is buying up old shopping malls to use as warehouses, retail properties are in a state of change and adaption, but always an integral part of investment opportunity.
As long as the accredited investor regards several factors such as income level, population growth and density, visibility, and location when looking to invest, the types of real estate on offer will remain highly competitive in terms of investment returns.
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