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So you’ve heard all about the potentially lucrative world of crowdfunded real estate, private placement deals, and venture capital. You know, the really sexy-sounding investments that can make you lots of money. But hang on — the websites say you need to be an accredited investor? What the heck is that?
Becoming an accredited investor doesn’t involve getting a special certificate or degree. There’s no coursework involved. Instead, the SEC defines an accredited investor by their net worth. All you need to do is prove to the investment firm or platform that you meet the SEC’s criteria.
So let’s find out what exactly the definition of an accredited investor is, discuss whether you should become one, and look for some alternatives.
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Accredited Investor Definition
Let’s cut right to the chase. Here in the U.S., the Securities and Exchange Commission (SEC) defines an accredited investor as someone who:
- Has earned income exceeding $200,000 (or $300,000 combined with a spouse) in each of the prior two years and is likely to do the same for the current year, OR
- Has a net worth greater than $1 million either alone or with a spouse (excluding their primary residence)
Why Do You Need to Be an Accredited Investor for Some Investments?
The SEC’s idea isn’t to be a spoilsport and prevent a lot of people from investing. Hedge funds, equity crowdfunding, venture capital, private placements, and the like are potentially risky investments. The people who fit the definition of an accredited investor are hopefully financially savvy and capable of taking on these increased risks.
Now, there’s no special certificate you can get from the SEC by mail to prove you’re an accredited investor. Instead, each individual investment company is responsible for doing due diligence and deciding whether or not you fit the SEC’s accredited investor definition.
Why would some companies want to go through all of this trouble? By offering an investment only to accredited investors, a company will be exempt from registering its securities with the SEC and holding a public offering. That would take a lot of time and resources.
How Do You Calculate Your Net Worth?
The SEC has created a handy table to help you determine your net worth:
| Jane Doe | John Smith | James Lee | |
|---|---|---|---|
| Primary residence (not included except for related liabilities below): | |||
| Home value | $500,000 | $500,000 | $500,000 |
| Mortgage | $300,000 | $200,000 | $600,000 |
| Home equity line | — | $150,000 | — |
| Included assets: | |||
| Bank accounts | $400,000 | $400,000 | $400,000 |
| 401(k)/IRA accounts | $400,000 | $400,000 | $400,000 |
| Other investments | $400,000 | $400,000 | $400,000 |
| Car | $20,000 | $20,000 | $20,000 |
| TOTAL INCLUDED ASSETS | $1,220,000 | $1,220,000 | $1,220,000 |
| Included liabilities: | |||
| Student and car loans | $100,000 | $100,000 | $100,000 |
| Other liabilities | $100,000 | $100,000 | $100,000 |
| Portion of mortgage underwater | — | — | $100,000 |
| Balance on home equity line (less than 60 days old) | — | $100,000 | — |
| TOTAL INCLUDED LIABILITIES | $200,000 | $300,000 | $300,000 |
| Net worth | $1,020,000 | $920,000 | $920,000 |
| Accredited investor | Yes | No | No |
Why Become an Accredited Investor?
So what are the benefits of becoming an accredited investor?
In short, accredited investors have access to some exciting investment opportunities beyond stocks and bonds. A lot of these opportunities are passive income generators. That means you don’t need to do much but sit back and watch the potential profits roll in.
Here are some of the most exciting opportunities for accredited investors.
Peer-to-Peer Lending
Also referred to as P2P lending, peer-to-peer lending involves matching potential borrowers with potential lenders. As an investor, you would be a lender.
Many P2P loans are personal loans. These can be loans that people take out not only for frivolous costs like weddings or vacations, but also to do something really helpful like consolidate debt. So this can be a feel-good investment too.
One of the hottest platforms for accredited investors interested in P2P lending is Upstart. The company charges low fees (only 0.5%) and requires a minimum of only $100. However, you must be an accredited investor to invest.
Your individual rate of return with Upstart can vary from nearly 4% to more than 15%, depending on the quality of the loan and borrower.
Alternatives for non-accredited investors: If you want to get into P2P investing but don’t meet the accredited investor definition, check out Prosper and LendingClub. You might not see the huge potential returns you’d get with upstart, but the investments will be safer. (Read our LendingClub review.)
Real Estate Crowdfunding
Real estate crowdfunding lets you invest in the lucrative world of property, but without getting your hands dirty. Typically, a real estate crowdfunding platform lets investors buy “shares” in residential or commercial properties (or even farmland — more on that in a minute).
RealtyMogul is one of the most popular real estate crowdfunding platforms. It offers institutional-quality investments in residential and commercial property. You could create a diverse portfolio that holds, say, an apartment community in Florida and an office building in Chicago.
Then there’s Roofstock. This crowdfunding platform lets you buy shares in one specific single-family home. On top of potential rental income, Roofstock investors receive an economic right in each property.
If you’re interested in farmland investing without becoming a farmer, there are two opportunities. Both AcreTrader and FarmTogether have simplified investing in one of the world’s most traditionally steady-earning assets. But you must be an accredited investor to take part. (Read our AcreTrader review.)
Alternatives for non-accredited investors: If you want to invest in real estate without doing fix-and-flips or having a renter call you in the middle of the night to fix a toilet, check out Fundrise.
This service lets you invest in portfolios of eREITS (real estate investment trusts). These real estate-based securities trade like stocks. And you can get in for as low as $500. (Read our Fundrise review.)
Should I Become an Accredited Investor?
If you meet the SEC’s definition of an accredited investor, then — congratulations! — you already are one. Remember, there are no fancy certificates needed. All you’ll need to do is send the investing company or platform their required documents demonstrating your net worth or income.
But what if you’re not already an accredited investor. Should you work to become one?
Having a net worth of more than $1 million and making more than $200,000 per year are both noble goals. If you can manage them, you’ll be well on your way to financial independence. So yes, if you’re serious about making money, you should strive to fit the definition of an accredited investor.
After all, once you are, you can take advantage of some special investment opportunities that could make you more money than plain old stocks.
However, if you’re not an accredited investor, there are still many ways for you to increase your wealth through investing. Just keep an eye on your financials — you may make accredited investor status before you know it.
Author:
Katherine Peach is the former managing editor of Money Done Right. She has more than 12 years of experience in the financial industry. She particularly enjoys writing about stocks and the markets, as well as investing in art and antiques. Learn more about Katherine.
