An accredited investor is someone who qualifies to invest, deal, and trade in financial securities and has a special status under financial regulation laws. The SEC has determined that there are two main criteria that can be used by an individual to become an accredited investor.

First, someone who has earned income of more than $200,000 or a joint income with a spouse of more than $300,000 over the past two years can qualify as an accredited investor. However, this qualification can only be provided if the individual expects to earn a similar income over the next year. Individuals can also be accredited investors if their individual net worth or their joint net worth is over $1 million when the investment takes place.

Avenues to Verification

Additional methods of verifying that you’re an accredited investor are also available if you don’t qualify for the net worth or high-income methods. When you are deemed to be an accredited investor, you can invest your money into non-registered investments that are provided by venture capital firms, private equity funds, and hedge funds. If you want to invest in the previously mentioned funds, the following article provides a guide on how to become a verified accredited investor.

Are You An Insider?

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An individual can be an accredited investor if they are a director, general partner, or executive officer of the issuer of the securities that are being sold or offered. While the majority of accredited investors receive this designation because of their income level or net worth, people who are directly tied to the unregistered security can also receive this designation. An unregistered security is any kind of stock, bond, or note that has yet to be registered with the SEC to be sold to the public. Being an accredited investor means that you can purchase these securities before they have been made available to the public.

Evidence Required to Prove Insider Standing

When you attempt to purchase an unregistered security from a hedge fund or private equity fund as an insider, you will be required to provide evidence that you are a director, general partner, or executive officer of the security in question. This evidence can be in the form of resolutions, incumbency, governing documents, or similar certificates. Anything that can prove that you are in an insider position may be accepted as evidence to prove insider standing.

There are times when this evidence could be publicly available via research reports, securities filings, or other kinds of information that are available through third-party sources. While only a small selection of individuals will qualify to be accredited investors through this method, it’s considered to be the easiest way to get verified.

Obtain a Professional Letter

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You can also become an accredited investor by providing a professional letter as proof, which must be provided to you only by qualified individuals. These individuals include:

  • A registered broker-dealer
  • A licensed attorney who is currently in good standing
  • An investment adviser who is registered with the SEC
  • A certified public accountant who is currently registered and is in good standing

What Does This Professional Letter Have to Say?

The professional letter that’s provided to you should state that logical steps were taken to determine that you are an accredited investor within the previous three months and that you were found to be an accredited investor. If you have a lawyer or accountant by your side who is able to provide this statement, you would be able to go through the verification process without needing to spend a significant sum of money. However, you may need to pay a small fee to obtain a professional letter.

It is also possible that the lawyer or accountant you work with won’t feel comfortable with providing this letter. One reason may be that these individuals have qualms about issuing a professional letter due to liability concerns. If this is the case, you may need to focus on becoming a verified accredited investor by showing evidence of high income or high net worth.

Does Your Yearly Income Qualify?

Likely the most common way to become a verified accredited investor is by having a certain income level. You can be deemed an accredited investor if you have earned income that exceeds $200,000 for both of the last two years.

Woman walking in front of bank

The same is true if you have earned joint income with your spouse which is more than $300,000 for the past two years. However, the income level verification can sometimes be difficult to obtain because you will be required to prove that you have a reasonable expectation of earning the same level of income in the current year. If you are unsure of the security of your employment in the future, it might be better to attempt to become a verified accredited investor via your total net worth.

It’s important to note that your income will need to be obtained in the same way for both years. You won’t be verified if you earn more than $200,000 as an individual for one year but make over $300,000 as joint income for the next year. Let’s say that you make $250,000 for the first year while your spouse makes next to nothing. This indicates that you would eventually become an accredited investor by displaying over $200,000 with individual income. If the second year has you making $150,000 while your spouse makes $200,000, you wouldn’t qualify as an individual but would instead only be above the joint income threshold of $300,000.

Even though you make more than $200,000 in both years, the money needs to be earned the same way both years in order for you to become verified. An exception to this rule is allowed if you get married or divorced during the two-year period but still meet the $200,000 or $300,000 threshold.

Evidence Required for Proof of Income

The easiest way to provide evidence that’s required for proof of income is to provide official or government records that display your income, which could be your regular pay stubs or your yearly tax filings. If you are unable to provide this documentation, it’s also possible to obtain a letter from your employer or accountant who confirms that your wages or annual income are higher than $200,000 or $300,000 with a joint income. If you need to request this letter, make sure that your employer or accountant also provides evidence that you will be able to maintain this income for the current year. Along with this letter, you must make a statement that you believe your income level will be above the threshold for the current year.

Are You Considered a High Net Worth Individual?

Man reading newspaper

You can become an accredited investor by proving that you have a high net worth, which means that your individual net worth or joint net worth with your spouse will need to be above $1 million. The main issue with making this calculation is that the positive value for your main residence isn’t directly counted when your total assets are being calculated. While the value of your home isn’t counted, any debt that was incurred over the past 60 days with your main residence will be subtracted from the value of your total assets. This method can be very simple to calculate if you happen to have zero liabilities and practically all of your assets within a single bank account. Otherwise, you’ll want to weigh the pros and cons of each option.

Evidence Required to Prove High Net Worth

While it might seem like proving high net worth would be the easiest verification method for becoming an accredited investor, it’s important to understand that you will be required to disclose both your assets and your liabilities so that the net worth can be calculated. It’s not enough to have more than $1 million in assets. It’s also important that the number of liabilities you currently have don’t lower your total worth to below $1 million.

There are three separate factors that are used when verifying that you have a net worth of more than $1 million. The first factor involves the credit report for yourself and your spouse, the latter of which is only necessary if you’re attempting to qualify for the high net worth verification through joint net worth with your spouse. If a U.S. credit report can be accessed, it should be provided. If you don’t have a credit report tied to your name, you will be required to explain why there isn’t a credit report, which can make verification difficult.

Person holding one hundred dollar bills

The next step in proving your net worth is disclosing all of your liabilities. If you have any liabilities, they will be deducted from your net worth. If you believe that there aren’t any liabilities tied to your name, you must make an affirmative statement that you don’t have liabilities. The final step involves disclosing all of your assets. When you disclose your assets, you will need to support them with documentation that shows you are the rightful owner of the asset. The asset’s value should also be calculated.

Different assets have different guidelines when you’re attempting to calculate your net worth. For instance, any insurance policies or annuities that you have could have a cash value to them, which means that they could be used as assets. For any bank accounts or certificates of deposit, you should provide your latest statement that displays the value of the account. If you gather the right documentation, you should be able to use nearly all of your assets as proof that you are a high net worth individual.

Diversifying Your Investment Portfolio As an Accredited Investor

Are you an accredited investor looking to diversify your portfolio? If so, consider investing in commercial real estate with AB Capital. With more than 75 years of combined experience, our professional staff has the experience and knowledge that are needed to assist customers with their investment needs. The main types of investment opportunities that we facilitate are secured investment opportunities for real estate.

There are multiple investment options that you can select from if you wish to diversify your portfolio. For instance, you could choose to invest in residential real estate or commercial real estate depending on your preference and the type of return you’re expecting. Our team can help you determine which investment strategy is right for your portfolio. Contact AB Capital today to get started!

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

Real estate investing is a highly varied investment strategy that involves the purchase or sale of real estate in order to gain profit. Once real estate is invested in, it’s also possible to own, manage, or rent the property depending on the exact strategy you would like to use. There are many different ways that an investor can place money into real estate, which includes everything from real estate trading to real estate investment trusts.

One notable type of real estate investing is debt investing with real estate, which involves providing borrowers with loans that they can use to purchase or develop real estate. You could also choose to invest in mortgage-backed securities as a form of real estate debt investing. When you invest in real estate debt, your investment is backed by the real estate asset serving as collateral. One notable form of debt investing involves placing money into a real estate debt fund, which is a popular type of investment pool that can net you a stable return.

You could also choose to make equity investments, which involve purchasing an asset that will provide you with a profit that’s dependent on the performance of the asset. One notable aspect of investing in equity is that you will be entitled to a specific share of the capital that’s gained by the asset. While there are a wide variety of different kinds of equity investments, one notable example is purchasing and managing a rental property where you gather income from the monthly payments that each renter must make.

One main difference between these investment types is that equity investors continue making money off of the asset as long as it performs well, which isn’t the case with a debt investment. If you’re currently interested in investing in real estate but are unsure if equity investments or debt investments would be better for your portfolio, the following article will go into detail about the pros and cons of each.

Pros and Cons of Debt Investments

two people reviewing real estate documents

Debt investments are an option for investors who want to better balance the overall risk of their investment portfolios. When you invest in debt investments for real estate, you will be acting as the lender to the property owner or the sponsor of the deal. While there’s always a chance that the borrower will not deliver the results that you expect from them, the loan is directly secured by the actual property, which means that you will be able to take control of the property if the borrower defaults on the loan.

When investing in debt, you will receive a fixed rate of return that’s determined by the interest rate on the loan and by how much money you have invested. Even though the fixed rate of return that you receive depends mostly on the interest rate that is set for the loan, it can be beneficial to know that you’ll obtain the same payments each month.

There are a wide variety of positives that come with investing in debt, the most notable of which is that these investments are considered by many to be safer than equity investing. The loan that you make will be secured by the property that the borrower wishes to purchase, which allows the property to be used as a kind of insurance policy for repayment of the loan. If the sponsor or property owner happens to default on the property, you can recoup the losses of your investment by foreclosing on it.

These loans generally have a much shorter hold period. Debt investments are usually associated with actual development projects, which means that the loan should be paid back in full at the completion of the project or soon thereafter. The holding period attributed to most debt investments is anywhere from six months to a couple of years. If you want to maintain a high amount of liquidity in your portfolio, this is a good form of investment. Another benefit of investing in debt is that it provides you with a steady income that’s predictable. Whether you are paid monthly or quarterly, you will know the frequency of the payouts you receive as well as the amount that you will receive since it’s based on the interest rate that has been set for the loan.

While there are numerous positives to investing in debt, there are also a few problems that you should keep in mind. Unlike equity investments, the debt investments that you make have a capped return. The returns you obtain are limited by the set interest rate, which means that equity investments have the potential of providing higher returns. There are also significant fees that come with participating in debt investment crowdfunding. The platform will take a small percentage of the money that’s earned through crowdfunding.

Pros and Cons of Equity Investments

An equity investment is a form of investing where the investor acts as a shareholder in the property that they’re investing in. The stake that they have in the property directly correlates with the amount that they’ve invested. The most notable aspect of investing in equity is that returns are obtained in the form of a certain share of the income that the property is able to generate from the rental payments. The amount that you receive is reduced slightly depending on the exact platform that you use to make the equity investment. Investors can also receive payments from the share that they have in the event that the property is eventually sold. These payments come directly from any amount of appreciation on the property.

There are many positives that come from investing in real estate equity. For one, these investments have the ability to generate high returns. These returns could be as high as 20 percent or greater. If the property is successful, its value could increase, which would lead to you receiving even more profit than you had anticipated. It’s also important to note that there is no cap on returns, which theoretically gives you the ability to make a large profit in comparison to your initial investment. If the asset happens to perform exceptionally well, you will be able to reap the benefits.

While equity investing is great if you want to maximize your returns, the main issue with investing in equity is that it often requires a lengthy hold period, which refers to the time between your purchase of the asset and your eventual sale of the asset. Holding onto an equity investment for a lengthy period of time may not be advisable if you’re interested in maintaining a high amount of liquidity in your portfolio.

Another negative aspect of investing in equity is that this type of investment comes with a high amount of risk. The property that you invest in could do poorly or fail altogether. When this occurs, the debt investors will receive payment before you, which reduces the possibility that you will get back the money that you’ve invested. Additionally, if you expect to receive monthly rental payments but find that your renters aren’t making their payments on time or that the property itself is considered to be undesirable for renters, you may not be able to obtain the kind of returns you’re looking for.

While both equity and debt investments have their pros and cons, the investments that you make largely depend on what would be best for your portfolio. When investing in equity for a real estate project, it’s possible that you will receive high returns in the event that the property performs well. As the owner of the property, you will also have direct control over many aspects of how the property performs, which means that it’s possible you could turn around a failing property. If you would rather invest in debt, these are many investments that yield stable returns and can help to diversify your portfolio.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

If you are currently investing in real estate or would like to do so in the near future, you might wonder if it’s necessary to obtain a real estate license to assist with your investments. A real estate license can help you save more on commissions while also increasing your income. But do you require a real estate license in order to make investments in real estate? The answer to this question is no, but this does not infer that it would be a bad idea to obtain a real estate license.

Even though it’s not required that you obtain a real estate license before making investments in real estate, doing so can provide you with a range of notable benefits. This article focuses on the many advantages that come with a real estate license, which should help you determine if getting a license is right for you.

Benefits of Obtaining a Real Estate License

model house with coins in background

There are multiple benefits that you can obtain by applying for a real estate license. Some of these benefits include:

  • You’ll gain access to many more deals
  • Your contact network will grow and expand
  • You can earn additional income via commissions
  • You will be able to have more control when investing in real estate

Multiple Listing Services

The most notable benefit of obtaining a real estate license is that you will have access to multiple listing services (MLS), which is a comprehensive database created by various real estate brokers to provide each other with extensive data about properties that are listed on the market. The goal of this service is to make sure that brokers can easily connect buyers with sellers. The MLS also helps to facilitate broader networking among real estate brokers in the industry.

table with piggy bank, magnifying glass and toy house

The real estate brokers and agents who pay membership fees are able to access an MLS. In return for the fee, real estate agents can obtain information on the properties that can be found in a specific area. This information includes complete listings, numerous photos, and details like property amenities and square footage. Keep in mind that only licensed brokers and agents are able to access an MLS, which is why it’s recommended that you obtain a real estate license before investing in real estate. While each specific MLS has its own procedures, they usually follow the rules and guidelines that have been set by the National Association of Realtors.

The rules that have been created by this association dictate that each listing will need to display the amount of commission that was earned for the seller. This commission is shared with the other broker or realtor who set up the introduction with the buyer. Multiple listing services are beneficial to both the buyer and seller. For the seller, the MLS provides them with more exposure for the property they are attempting to sell. On the other hand, buyers have many more options at their disposal and should be able to more readily find the right home. These services also help to even out the playing field by making sure that smaller brokerages are able to compete with larger ones.

You Earn Commission

The commission that a real estate agent gets refers to the fees that the agent is owed when the property is sold. The agent earns a commission when a buyer purchases the property as long as they represent the buyer. The agent for the buyer can submit offers for the property and negotiate with the listing agent. They also deal directly with the home appraisers, inspectors, closing attorneys, lenders, and any other party that takes part in the closing of the transaction. You will also be in charge of marketing, sales, and showing properties to prospective buyers.

planted money in garden

If you decide to obtain a real estate license, you will be able to forego using a real estate agent when investing in a property, which means that the standard commission fees they receive won’t come out of your pocket. Instead, you will act as the agent, which means that you can make money by facilitating the transaction. The commission fees that you should expect to receive typically amount to 2-3 percent of the property value. However, you’ll likely need to negotiate the commission split when you sign on with your brokerage.

The majority of brokerages have a base commission split that’s offered to newer agents. Eventually, you will have a significant amount of experience as a real estate agent, which may come with an increase in the commission split that you receive. High amounts of production may also lead to an increase in your commission split. In any regard, having a real estate license allows you to make a commission that would otherwise be unavailable to you when investing in a property.

You Are in Control of Your Real Estate Investments

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Likely the best aspect of getting your real estate license is that you will be in control of your real estate investments. When you invest as a real estate agent, all aspects of the transaction go directly through you. Without this license, you would likely need to work with a real estate agent to negotiate and submit offers, which also means that you wouldn’t obtain a commission from the property being sold. When a deal has been reached and the property is being closed on, you can also be directly involved with every element of this process, which means that you would speak directly with home inspectors, closing attorneys, appraisers, and lenders. Before you obtain a real estate license, it’s important that you understand what the process involves when working with a buyer or seller.

When you work with sellers, you will be tasked with meeting with the seller and understanding their needs. Throughout the transaction, it’s up to you to display your knowledge of the market, your negotiation skills, and your marketing abilities. Among the most important tasks for a real estate agent is to set the right listing price, which will involve studying the local real estate market and comparing the main property with other properties in the area. Once the right price has been reached, it’s time to list the property with any relevant listing service. In order to provide a comprehensive listing, numerous photos will need to be taken of the exterior and interior of the property. Finally, it’s important to stage the home correctly so that prospective buyers find it appealing.

Working with a buyer is an entirely different process and typically involves meeting with and understanding the needs that the buyer has when searching for a home. The information that you obtain from the buyer can then be used on the MLS to identify properties that match these specifications. Once the right property has been identified, you will need to plan a showing of the property while working around the buyer’s schedule. When showing a property to the buyer, make sure that you communicate every feature that they might be interested in. While touring the property, you will also have an opportunity to talk with other agents, which might allow you to obtain useful information. If the buyer is interested in the property, all that’s left to do is to make a purchase offer, which will likely lead to negotiations with the seller’s agent. During these negotiations, you will need to negotiate on behalf of the buyer’s interests.

Want to Diversify Your Real Estate Investment Portfolio?

two people reviewing real estate documents

Obtaining a real estate license can be highly beneficial when you want to build a strong and steady investment portfolio. With this license in hand, you should have a much easier time identifying properties that would make a good investment since you will have access to multiple listing services. You will also have direct control over the entire selling or buying process, which should make it easier for you to negotiate the kind of deals that you want. By acting as the real estate agent, you should make a sizable commission by connecting a buyer to the seller, which would otherwise be impossible. Even though it’s not exactly necessary to have a real estate license before you invest in real estate, it can potentially be more rewarding for you and your investment portfolio.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.