The Biggest Mistakes First Time Investors Make

5 Steps to Becoming an Accredited Investor

06 01 2017

5 Steps to Becoming an Accredited Investor

As new movements within commercial real estate investing continue to draw the attention of wealth-minded individuals and financial advisors alike, one term has puzzled even experienced investors more than any other: accredited investor.

What are “accredited investors,” and how do you become one? Are there certain advantages accredited investors can enjoy that other investors cannot? Or is it all hype?

What is an Accredited Investor?

Simply put, accredited investors are investors who meet specific minimum standards set out by a financial institution. There are industry standards, but each financial institution may have their own individual methods for deciding which investors they’re willing to work with.

The label “accredited investor” is an informal and relatively new one. While many organizations and institutions have had their own methods of qualifying prospective investors in the past, some newer and highly publicized investment avenues (such as real estate crowdfunding and others) have used this term as a way of describing their pre-qualification approach. However, there’s no official accreditation process.

So why all the fuss? Well, the U.S. Securities and Exchange Commission (SEC) has set out strict rules requiring companies to confirm the financial status of their investors. As the gap which used to exist between high end institutions and the average investor narrows, it’s important for institutions to qualify prospective investors to ensure everyone’s protected.

5 Steps to Becoming an Accredited Investor

Whether you’re eager to learn more about this informal label, or you’re still in the process of learning how to invest in real estate, it’s best you understand the steps to getting there – so you can determine whether it’s right for you.

1. Discuss your financial goals with your financial advisor.

We recommend this as your first step to nearly every financial decision you make, but particularly when it comes to saving or investing. Your financial advisor is a part of your financial team, and is dedicated to helping you reach your financial goals. Are you saving for a specific goal, for retirement, or for something else entirely? These are all areas of expertise that your financial advisor is equipped to discuss with you.

They’ll be able to offer their perspective on being an accredited investor, as well as share whether that label is even a necessary step toward reaching your personal financial goals. After discussing with them, you may discover it’s a better financial choice to pay off debt. First and foremost, you should be focused on determining your goals with your advisor – everything else is secondary.

2. Determine which types of investments fit your situation.

Should you and your financial advisor determine that investing is a strategy that would benefit you, the next determination you must make relates to your portfolio. There are more investment types and opportunities than we can adequately describe here, but they all carry their own potential benefits – and risks.

Similarly, most investment opportunities do not fall within the real estate investing market, and even some real estate investing opportunities have no accreditation requirements. Should you determine with your financial advisor that a specific fund or stock is the healthiest place to begin investing, being an accredited investor might be irrelevant to your portfolio.

3. Ensure you meet income requirements.

To be considered an accredited investor, you must meet a set of requirements. As we mentioned, these requirements do vary somewhat from institution to institution, but the standard minimum when it comes to income requirements is to have earned at least $200,000 in the past two years. For married individuals who have a joint income with their spouse, at least $300,000 is the minimum. In both cases, that level of income is expected to continue into the current year.

4. Meet or save up to net worth minimums.

We’ve established that accredited investors must have a robust income, but that’s not the only requirement – they must also have a high net worth. Accreditation requires an individual (or joint with a spouse) net worth that exceeds $1 million at the time of investment or purchase. This net worth should not include the value of your residence. Again, individual minimums vary by institution, so it’s always best to check there for specifics.

5. Collect and organize the relevant financial documents.

Should you meet all the minimum requirements, you’ll need some way of proving that to the institution – the SEC has established strict rules that require companies to verify investor status. The process of gathering all the materials can be daunting, so some companies are willing to consider a letter from an attorney who has reviewed and summarized your financial situation. It’s always best to touch base with the company and your financial advisor to ensure you’re taking the proper steps to confirm your status as an accredited investor.

Should I Become an Accredited Investor?

If you determine with your financial advisor that certain wealth-growing opportunities fit your financial situation, and if those opportunities require accreditation, then becoming an accredited investor will be a crucial step.

If not, don’t worry. Your priority when it comes to investing shouldn’t be about labels, but rather about pursuing financial opportunities that align with the goals you’ve laid out with your financial advisor. Together, you can determine a winning strategy – whatever that may mean to you.

This article is a part of our complete guide to investing in real estate, a comprehensive resource for anyone looking to invest in real estate. Read more here.

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