You’ve probably heard the terms “accredited investor” and “sophisticated investor” when researching investment opportunities, but do you know how these terms apply to the multifamily space?
You might be surprised!
In today’s video, we’ll talk about the reasons why accreditation is so appealing, and how you can work your way into the next level of investing.
Accredited Investor: Defined
It’s important to note that the definition of an Accredited Investor is set by The Securities Exchange Commission (SEC).
By their current definition, an Accredited Investor has an annual income of $200,000 (or $300,000 in joint income) OR they have a net worth of $1 Million, excluding primary residences.
If you fit those parameters, congratulations! You are an Accredited Investor. This label gives you the opportunity to pursue investments that non-accredited investors cannot access. (More on that in the next section).
But first – why does the SEC make these distinctions?
According to their website, the SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” By setting rules around who can invest in certain funds, the SEC is helping to protect people that don’t have a lot of money to risk.
In their view, someone who is a non-accredited investor is going to be hit harder by losing $50,000 in an investment when compared to someone who is in the top 5-10% of earners in the country.
The SEC assumes that someone with more money has more sophistication and knowledge about the investments that they're making. Therefore, a person with less money should be protected.
Accredited Investor: Benefits
If you're an Accredited Investor, the primary benefit is that you have access to different investments and are exposed to various asset classes.
For example, if you're a high net worth individual, you typically have a financial advisor or broker who has access to IPOs, which isn’t available to the average person. Or, they start exploring alternative investments with you such as oil or multifamily syndications.
Beyond exposure, some investments are only open to Accredited Investors or are limited in the number of non-accredited investors that they may include in the fund. For example, a 506b offering can include an unlimited number of Accredited Investors, but can only be sold to a total of 35 non-accredited investors.
In the multifamily space, some operators prefer to work with Accredited Investors because they can work with larger raise amounts and fewer investors. Accredited Investors may get first access to a deal because they are pledging larger investments. They may even get a higher return than someone with a lower investment amount.
There are definitely advantages to having money because you have more opportunity in some ways, and less compliance issues as well.
So what if you are a non-accredited investor? Are you out of the game?
Leveling up to “Sophisticated Investor”
Yes, there are some serious compliance restrictions in place when it comes to investing. As an operator, I have to play by these specific guidelines and be cognizant that the SEC is more relaxed when it comes to working with Accredited Investors.
Simply put: it’s a risk for me to take on non-accredited investors. But that doesn’t mean it’s impossible.
The best thing that a non-accredited investor can do on the road to Financial Freedom is to become what's called a “Sophisticated Investor”. This means that the person has some education or real-life experience related to investing. Maybe you’ve taken a course on the topic, or even have a rental property.
To become a Sophisticated Investor, you must show that you are knowledgeable about the investment class.
Now this is important because in order to be one of those 35 non-accredited investors in a 506b offering, you have to have a “substantive pre-existing relationship” with the person you're investing with.
This means that you can’t just start investing with someone that you've met yesterday. You must have a relationship with that person. And if the operator is good, they know these things. They won't just solicit and take anyone's money.
Building the Relationship
A good operator is going to build a relationship with you. In that process, they're going to ask you questions around your previous experience and knowledge.
As operators, we don't want to take someone's money that has no idea what they're getting themselves into. If they think it's like a stock, where they can buy it and get out every single time, that's not going to work for them, right?
Related Article: How to Analyze a Passive Investment Opportunity
If they're not willing to hold their investment, or they don’t understand the illiquidity of it or even the risk potential, we don't really want to have that person invest. It's not right for that passive investor. It's not a fit for them, and it’s not a fit for us.
Therefore, that non-accredited investor has to sell themselves to some degree. “Yes, I know what I'm doing. I've done this before. I know exactly what I'm getting into and I wanna invest with you.”
Okay! Well let's build a relationship and I can present you with other deals.
As a non-accredited investor, you gotta put a little bit of work into it. You can't just have a bunch of money and go, “I'm here!”. Because a lot of times, especially when money is plentiful, there's a choice of taking somebody who is accredited or non-accredited.
You have to just demonstrate that you know what you're getting into and you have to be somewhat knowledgeable.
Watching educational videos and books is one way that you can become a more sophisticated investor that is attractive to operators. An even better way is to network with people. Go to events, gain new knowledge and make new contacts!
In fact, we’ve got a virtual event called Deal Maker Live that is coming up in July. It’s a conference that we hold every year, and is a great way for Operators and Investors to meet and start those conversations.
Check out the details at www.dealmakerliveevent.com and buy your tickets before the networking sessions fill up!
If you aren’t able to join us, you can continue your education through these resources that I’ve created for investors interested in multifamily deals:
Or, if you’re ready to take the next step and discuss deals that we have going on at Nighthawk, go to our website (www.NightHawkEquity.com) and click the “join” button. We’ll set up a call to get to know you and your investing goals.
Thanks for joining and I’ll see you in the next video!