When I first started investing passively in real estate through the syndication model, I was asked if I was an accredited investor or just a sophisticated investor. At first, I was confused and intimidated by the jargon, and I wondered if I should just keep feeding the 401K and index funds like everyone I knew. Instead, I decided to dig in and educate myself further to make sure I could “talk the talk” in this new and exciting space.
The topic of sophisticated or accredited investors comes up in this space as you need to meet certain requirements to invest in private placement investments like apartment syndications. Ultimately, the more sophisticated and wealthier you are, the more options you have to invest your hard-earned money.
Let’s add to your education in the space today with a simple definition:
Accredited investors need to satisfy one of the following criteria:
1. An individual with income more than $200,000 for a least a couple of years or a couple with income more than $300,000
2. A household with more than $1MM in net worth excluding their personal residence
There are some other options and more details, but if you can check either of the items above, you are safe to call yourself an accredited investor.
The more complicated designation is the Sophisticated Investor. Sophisticated Investors are not necessarily accredited investors, but they generally have significant financial wealth and must be sophisticated enough in financial and business matters to be able to understand the risks of an investment. Accountants, bankers, and business owners can usually meet the requirements to fall under the sophisticated investor designation as can others with significant financial and business acumen.
Once you’ve identified what type of investor you are, you can now start to look for operators and investments that you are qualified to work with. There are several sources that you can leverage to find those investments, but we’ll leave that for another day. With this information, you’ve added another tool to your investor’s tool belt that will help you to decrease your dependance on your W-2.
