Today’s question comes from Melissa and she writes in and says, hi, Marco, avid listener here and second time, I’d like to ask you a question. I’ve heard advantages of being an accredited investor, but how do I get to be one? Specifically, I’d like to know about the option of having a net worth of a million dollars. Since my primary residence is not included. How about the cash-out refinance pulled out if it’s put away in savings, can that be included in our net worth? Why do syndications prefer an accredited investor?
Thank you for all the information.
So, Melissa, thanks for the question. I had to actually read this twice because I thought it was a pretty smart question to ask. I never really stopped to think about pulling equity out of your principal residence, which is not included in the definition of being an accredited investor and then parking it away in savings, which by definition contributes to your overall net worth. So to give you a ridiculous, but hypothetical example, if you had a $10 million home that would not qualify or count towards the definition of being an accredited investor, but if let’s just say you didn’t qualify as an accredited investor with a $10 million home, because you just don’t have the income or the assets around it, but you pulled out, let’s say one and a half million dollars of equity and parked it into a savings account as liquid cash that technically qualifies you as an accredited investor.
So let’s talk about the definition. Well, let’s start right there. First of all, the definition of accredited investor is essentially someone who either a, has a net worth that exceeds $1 million. And this does not include your primary residence. So you cannot include your principal residence. And this is why I thought her question was kind of insightful or at least very creative.
So that’s the first definition or qualification criteria is you have to have a net worth that exceeds $1 million, or if your income exceeds $200,000 per year over the last two years or $300,000, if you filed jointly with your spouse over the last two years, then you qualify as an accredited investor. And by the way, the 300,000 doesn’t necessarily mean combined. It could be just one individual or a combination of the two, but in essence, the combined income between you and your spouse. So it’s either, or, and this is really the definition from the SEC, the Securities and Exchange Commission. So under what they call Regulation D as in dog, under Regulation D to be an accredited investor, you have to meet one of these two criteria. There are some other rules and exceptions and ways to qualify, but generally speaking, this covers most situations for most people. Most of the time, it’s really one or both of these two items. So that’s the definition.
Now I got thinking, why was Melissa asking this question? I have to imagine this because our sister company Norada Capital Management has been offering on and off for years, especially this year, we’ve done five or six rounds of offering short term promissory notes as an investment, but you need to be accredited to qualify, to be invested in one of those note offerings, which is pretty lucrative because the returns are up to 16.7% per year interest on those notes. And they’re typically a three-year term three-year note. It could be shorter. And so, unfortunately, I can’t take someone into that and offer them or sell them a promissory note unless they’re accredited. So I’m guessing that that spawned this question.
So does the cash out from your principal residence qualify? I can’t say definitively 100%, but just based on what I know and what I’m reading in terms of what’s on the SEC’s website, it would appear that the cash-out refinance, meaning pulling equity out of your principal residence and parking it as savings meets the qualification criteria of it contributing to your overall net worth. Now you asked another question, you know, why be accredited? Why do syndicators and whatnot prefer an accredited investor? Well, it’s not that they prefer you being accredited. They don’t have a choice because if you file an exemption with the SEC to raise capital, it’s usually under what they call a Rule 506, it’s a Regulation D 506 and it’s subcategorized as either a B or C, but in either case, they are required to take capital from accredited investors. And I think the reasoning behind this is that the SEC feels that you as an investor have to have a certain level of understanding and sophistication or experience in being able to invest in these, what are often more lucrative deals than are available to the majority of the population?
So, so the advantages basically being an accredited investor can provide you the advantages of investing in opportunities that are not widely available to most people. And that accelerates your wealth building and allows you to diversify. So higher rates of return is one major advantage. And the second is diversification in areas, opportunities, and investments that are typically not available anywhere else. And so what this does is it opens the door to opportunities such as private placements and syndications in real estate or syndications, and literally anything could be oil and gas, a syndication. It could be in commercial development syndication can be in a portfolio of companies. It could be almost anything, anything under the sun that can be an investment and requires the operator or the syndicator to raise capital from private individuals often has greater upside potential than basic investments, such as, you know, stocks, bonds, mutual funds, and the normal, plain-vanilla variety of investments that are out there.
So this is why you would want to be an accredited investor. I really can’t think of a disadvantage of being accredited. It just really just shows a certain level of understanding and sophistication because you had to have done something right for a period of time to get to that point. However, I will say this, and I know this for a fact because I know many people who fall into this category, it’s actually pretty amazing how many people do not have a level of sophistication or understanding about investing and investments that actually are accredited well accredited. It’s just that they have had a high enough income for a long enough period of time where they’ve had a portfolio of real estate or whatever it may be that has given them the net worth to be accredited, to qualify, but still are very novice when it comes to their financial IQ, their financial intelligence.
So just because you’re an accredited investor by definition, doesn’t mean you actually are knowledgeable, experienced, or sophisticated enough to make sound decisions when it comes to investments. Anyway, I don’t want to ramble on, but given a choice between being accredited or not being accredited all day long, your decision should be to be accredited because if you’re accredited, that means you’re earning a higher income and, or your net worth is above a million dollars. And that’s a good place to be because it just provides you more options and greater freedom.
So anyway, I hope that helps Melissa. Thank you for the question. Remember to subscribe to the show if you haven’t done it. So thank you for listening and I will see you on our next episode.
Are you having a hard time finding great investment properties? Unfortunately, the best deals are rarely found locally successful investing begins with the right properties in the right markets. Norada real estate provides everything you need to invest in the best deals across the US. Our simple proven system will help you create real wealth and passive monthly cash flow. Get your free copy of the ultimate guide to passive real estate investing at www.NoradaRealEstate.com/guide.