Are you looking to make passive real estate investments, but don’t have a high income or net worth? You may be discouraged to find that many options require accreditation. But there are still opportunities for you.
Many real estate investors are unaware that non-accredited real estate investing options exist. These options can provide excellent opportunities for those looking to invest in real estate but may not be familiar with all the ways to invest.
In this blog post, we will outline some of the non-accredited real estate investment options that are available so that you can make an informed decision about which option is best for you.
What’s The Difference Between Accredited And Non-Accredited Investors?
Accredited investors are those who have a high net worth, usually over $1 million. They typically have a high income and the ability to make substantial investments. Non-accredited investors are anyone who does not meet the requirements of being an accredited investor.
Non-accredited investing is becoming increasingly popular as more people look to invest in real estate without meeting the stringent criteria set for accredited investors. If you’re just starting on your investing journey, you’re most likely a non-accredited investor.
With time and patience, you can reach the milestone of becoming an accredited investor. When you do, you’ll get access to more investment options like:
- Private Equity
- Hedge Funds
- Many Real Estate Investments
Criteria For Becoming An Accredited Investor
Being an accredited investor is simply about reaching one of two financial milestones. An accredited investor has either a high net worth or a high income.
The financial criteria for becoming an accredited investor are set by the Securities and Exchange Commission (SEC). The SEC requires at least $1 million net worth or $200,000 in income ($300,000 with a spouse or partner) to be considered an accredited investor.
These rules are in place to protect investors from potentially risky investments. The idea behind these rules is that beginning investors with a small amount of capital don’t yet have the financial education to evaluate these investment opportunities.
In addition to these financial criteria, the Securities And Exchange Commission added “Professional Criteria” as an alternate way to become an accredited investor. These rules allow certain people who don’t meet the financial criteria but understand investing to become accredited.
Option 1: $1,000,000 Net Worth
The first option for becoming an accredited investor is through net worth. To be accredited, you must have at least $1 million of net worth.
The net worth criteria includes all of your assets minus liabilities. For this specific calculation, a person’s primary residence and mortgage, vehicles, possessions, etc aren’t counted. Only your investable assets are considered, so look at your investing and retirement accounts, bonds, and other real estate holdings to see if you qualify.
Option 2: $200,000 In Yearly Income
The second option is through income. To be considered an accredited investor, you must make at least $200,000 in individual income or $300,000 with a spouse or partner.
When looking for income to qualify for accreditation, only your gross annual income is taken into account. The easiest way to determine this is to look at your previous year’s tax returns.
The SEC also wants to see this income level consistently over the past few years. You must exceed this income hurdle for the past 2 years and “reasonably expect to achieve the same for the next year”.
Option 3: Professional Criteria
The final way to become an accredited investor is through professional criteria. This option allows people who have significant experience in financial matters, such as registered securities professionals, to be considered accredited.
Professional criteria extend to other individuals such as directors, executives, or general partners in a company that sells the security as well as to family clients of family offices that are accredited.
This option was added as an amendment to the original definition of an accredited investor by the SEC in 2020.
What Is A Sophisticated Investor?
The term “sophisticated investor” is often used interchangeably with “accredited investor”, but there’s a difference. A sophisticated investor can invest in certain private investments that don’t necessarily meet the criteria for an accredited investor.
Sophisticated investors are generally expected to be more knowledgeable about financial matters and investing than regular investors and may be willing to accept a higher level of risk. They can invest in private equity, hedge funds, and other types of investments that aren’t always available to the general public.
In order for a sophisticated investor to make an investment, the company sponsoring the investment must meet certain criteria. The primary limitation is that the investment opportunity cannot be listed in the public market.
If the company meets this and other requirements, it can allow an unlimited number of accredited investors and up to 35 sophisticated investors to join.
The rules for this type of investment are covered in the Securities and Exchange Commission Rule 506 of Regulation D.
Can Non-Accredited Investors Invest In Real Estate?
Yes, non-accredited investors can invest in real estate. Real estate investing is a popular option for accredited and non-accredited investors because it provides a stable investment opportunity with the potential for high returns.
Non-accredited investors can still invest in real estate through real estate crowdfunding platforms and other online real estate marketplaces, as well as through passive income investments, such as turnkey rental properties and real estate investment trusts (REITs).
These types of investments typically require less capital and are a great way for non-accredited investors to get started in real estate investing. Additionally, these investments can provide portfolio diversification and the potential for long-term wealth creation through capital appreciation and cash flow. For many investors, real estate is the path to financial freedom.
In order to invest in real estate through traditional methods such as purchasing property, non-accredited investors may need to partner with other real estate investors who can provide the necessary capital for the purchase. This allows non-accredited investors to benefit from the expertise and knowledge of their partners while still having an opportunity to invest in real estate.
What Is The Minimum Investment For Non-Accredited Investors?
The minimum initial investment amount for non-accredited investors will vary depending on the type of investment and the company or platform offering it. Generally speaking, most investments require a minimum initial deposit of at least $500 to $1,000. However, some platforms like FundRise offer as low as $10 minimum investments into their real estate fund.
For certain types of investments such as real estate crowdfunding platforms, additional investor fees may apply. Additionally, some investments may also require an annual management fee or other types of recurring payments in order to participate.
It is important for non-accredited investors to research the different investment options and understand any potential fees that may be associated with the investment before making a decision.
Tips For Non-Accredited Real Estate Investing
For non-accredited investors looking to invest in real estate, there are a few essential tips to keep in mind.
- Limited Options — As a non-accredited investor, you won’t have access to all options. But that doesn’t mean there aren’t good options for you. Be diligent and continue investing to reach the financial hurdle of becoming accredited.
- Don’t Get Discouraged — With limited options, it can seem like there are no options. Keep looking and get creative. Maybe you have a friend or family member who invests in real estate. See if you can invest with them.
- Read The Fine Print — Real estate investments aren’t as tightly regulated by the SEC as the stock market or mutual funds. Make sure you read all of the disclosures and documents if you’re investing with a sponsor so you know what to expect. The last thing you want is all of your gains eaten up by various fees.
7 Real Estate Investments For Non-Accredited Investors
Real estate investments are a great way for non-accredited investors to diversify their investment portfolios and build wealth over time. Here are seven real estate investment options available to non-accredited investors:
1. Direct Ownership
Buy and manage your own property. This can require a significant down payment, but you get to keep all rewards from cash flow to capital appreciation.
Owning a rental property for the long term can be one of the most financially rewarding investment options. But you have to make the numbers work. You can find investment properties to rent out for more than it costs you to cover the mortgage payment, taxes, insurance, and repairs.
Additionally, you’ll gain appreciation on the rental property. According to CreditKarma, the average appreciation on a house is 4.3%. If you have a 20% down payment, that return is multiplied 5x to generate an actual return of 21.5%. That’s the power of leverage.
2. House Hacking
House hacking is a subset of direct ownership. However, instead of renting an entire house to another person, you rent part of the house you live in.
This can take many forms from renting out bedrooms to purchasing a duplex/triplex/quadplex and renting out the rest. There are also more creative ways to do house hacking. If you own a property with land, you might rent storage spaces for RVs or boats.
The possibilities with house hacking are abundant. It’s up to you to get creative with creating cash flow from a property you live in.
3. Joint Venture Partnerships
Another form of direct real estate investment is through joint venture partnerships. With a joint venture partnership, you bring on a partner.
This can be a great option if you don’t have the capital to invest in real estate. You can arrange a partnership if you have friends or family who have money but don’t have the time, knowledge, or willingness to manage a rental property. You manage the investment property and they provide the capital.
With a joint venture partnership, you split the equity between yourself and the investors. You’ll get significantly outsized returns on any investment because you’re working to manage the property. You might arrange 30-50% of the ownership for yourself depending on how much outside investment you use.
4. Private Real Estate Syndications
Private real estate syndications are a great way to invest in large commercial properties without the hassle of managing them yourself. With private syndications, an investor brings on multiple passive investors who contribute capital but don’t make any decisions related to the property.
Private real estate syndications are similar to joint venture partnerships, but on a larger scale and often focus on commercial real estate investing.
In a syndication, the general partner or partners will handle all of the management and decision-making. The passive investors will receive a preferred return (a guaranteed minimum rate of return) before the general partners are paid out.
Private real estate syndications are an excellent way for non-accredited investors to get exposure to large commercial properties without having to manage them.
However, not all syndications accept non-accredited investors. The syndication must be set up specifically to allow non-accredited investors through an SEC Rule 506 Regulation D exemption.
One disadvantage of a private real estate syndication is it often has a high minimum investment. This is because the syndications look for larger commercial real estate investments with a small pool of investors.
5. Real Estate Crowdfunding Platforms
Real estate crowdfunding platforms are a relatively new form of investing in real estate. It’s similar to private real estate syndications, but without the high minimum investment required. With a syndication, you own an equity share in the actual real estate project.
Real estate crowdfunding sites like FundRise allow you to invest as little as $10 for a starter portfolio or $1,000 for a basic portfolio. We’ve put together a list of real estate crowdfunding sites when you’re ready to start investing.
The way it works is that the platform pools investor funds to buy a larger property. The investors then share in the profits earned by that investment, similar to private syndications.
Real estate crowdfunding platforms offer several advantages over traditional real estate investing. First, it allows smaller investments with lower minimums than private syndications. Second, it’s more hands-off for the investor—the platform handles all the deal-making and management. Finally, it provides greater diversification than investing in a single property.
The key downside to real estate crowdfunding is that fees are often higher than traditional investments. The platforms have to charge extra fees in order to make a profit from many smaller investors. You should always understand all of the fees associated with any investment before you commit.
Learn more about real estate syndications.
6. Real Estate Investment Trusts (REIT)
Real estate investment trusts (REITs) are a way to invest in real estate without actually owning a piece of property. A REIT is like a mutual fund that invests in real estate and pays out dividends to its investors.
There are several different types of REITs, including residential, commercial, mortgage-backed, and hybrid. They all have slightly different characteristics, but the basic concept remains the same: investors buy shares in a REIT and can receive income from it in the form of dividends.
You can find publicly-traded REITs on platforms like E*Trade or your bank may offer access to private REITs.
REITs may provide more liquidity than other types of real estate investments—you can sell your shares at any time. However, they also come with certain risks. For example, REITs are subject to the same market forces as stocks and can be affected by interest rates, tax laws, and other economic conditions.
Overall, REITs may be a good option for investors who want a hands-off approach to real estate investing.
But keep in mind that REITs are different than syndications in that you don’t actually own any equity in the rental properties. Instead, you own a share in a company that owns real estate.
7. Debt Investment
Debt investing in real estate is another passive way to invest in real estate. It works similarly to a loan, but instead of the bank providing the funds, you do.
With debt investments, you provide capital to developers or owners who are looking for financing for their projects. In exchange, they pay you back with interest like they would a bank. This form of investing is very low risk and can provide a steady, reliable return for investors.
The downside to debt investments is that it requires a large capital investment upfront. Also, the returns are usually smaller than those from equity investments because you don’t own any part of the actual property.
You can find debt investment opportunities on several of the real estate crowdfunding sites which allow relatively low minimum investments.
Summary
Real estate investing can be a great way to build wealth over time, but it’s important to understand all of the different options available before committing your hard-earned money.
Whether you’re looking to build passive cash flow through rental income or grow your net worth through capital appreciation, you can find great real estate investment opportunities even if you’re not accredited.
If you’re ready to get started, check out our comparisons of the best real estate crowdfunding platforms.