By Chris Pauling
Why does the SEC require only Accredited or Sophisticated Investors to work with us? They simply want to protect people. They know there are many people who want to invest who in the SEC’s judgement may not have the resources saved up to take on the risk. Also, again from the SEC’s perspective, non-accredited investors may not have the knowledge to make sound investing decisions.
While we might disagree with those blanket assumptions, and know many non-accredited investors with just as much knowledge and expertise as anyone, we of course must comply with their regulations.
What Is An Accredited Investor?
Let’s start by defining what an accredited investor is. To qualify as an accredited investor, you have to meet at least one of two criteria:
An accredited investor is an individual who meets specific financial criteria. There are two ways to qualify as an accredited investor. The first criterion is based on net worth, where an individual must have a net worth of at least $1 million, excluding their primary home. Meeting this criterion automatically qualifies them as an accredited investor, regardless of their income level.
The second measure is based on income, where an individual must have earned $200,000 in income over the last two years, or $300,000 together with their spouse, and have the intention of continuing to do so this year. Meeting this requirement also qualifies an individual as an accredited investor.
An individual can qualify as an accredited investor by meeting either of the criteria. Depending on the investment opportunity, they may need to self-report their status or provide documentation such as tax returns to prove their accreditation.
What Happens If You Are Not An Accredited Investor?
If you do not meet the criteria for being an accredited investor based on the information provided above, don’t worry. There are many real estate investment opportunities available to you, and making those investments will put you on the path to becoming an accredited investor faster than you think!
The fact you are exploring how to invest passively in real estate puts you way ahead of most people. Too many people are not focused on how to grow their wealth, and make strategic investments to create income in addition to their job, so they can achieve financial security and create options for themselves.
By focusing on what you can do, and then taking consistent action, you will enjoy all the benefits of real estate investing. There are many opportunities and a vast number of strategies you can utilize to achieve your investing goals.
How Can I Invest Without Being Accredited?
There are many options especially if you’re willing to potentially put in a little work.
Let’s look at eight ways that anyone can invest in real estate and build additional income, regardless of whether or not you’re an accredited investor:
- Fix-And-flips
- House Hacking
- Buy-And-Hold Rental Properties
- BRRRR Strategy
- Private Lending
- Joint Venture Partnerships
- Real Estate Crowdfunding Platforms
- Private Real Estate Syndications
#1 – Fix-And-Flips
If you prefer a more hands-on approach to real estate investing and are seeking short-term returns, a fix-and-flip investment could be a viable option for you. Finding properties that can benefit from simple updating, to major remodels, is a proven method. How many TV shows are there now documenting how to do this? (We’ll reserve judgement on how much “reality” actually exists in these shows!)
Finding the right properties can be a challenge. Ideally you find a home that is in its original condition when it was built back in the day. The best candidates are homes that are in good condition but are very dated. If you can avoid major repairs like termite or foundation damage, and instead just do a refresh, it’s amazing what a light renovation can do for a home, and it’s value.
Sometimes reconfiguring a few walls can help open up a dated floor plan, but we’ve found that replacing simple things such as lighting, cabinets, countertops and sometimes windows can add thousands of dollars in value. Small changes like swapping out old light switches and outlets for modern style toggles in white make a huge difference.
If you have the skills, you can do a lot of the work yourself, thereby reducing your costs. The trick is managing your time and hiring the right sub-contractors to do the critical high skilled work. Knowing that time is one of the most sensitive parts of a return-on-investment calculation, it’s critical to not spend too much time saving on labor costs by doing it yourself. Plus, your time is likely better spent on finding the next project to tackle.
One potential challenge to consider is the cost of entry, especially if you reside in an expensive market. Properties in many major cites in need of significant renovations or even teardowns can easily cost in the high six figures, which would require a sizable down payment, as well as additional funds for renovation expenses and mortgage payments during the renovation period.
Finding good options for financing these properties is a key. There are some traditional lenders that can provide rehab loans, though they come with a lot of requirements. There are also private lenders who focus on providing debt for fixer uppers. These are short term and high interest rate loans, though many investors find that is a small price to pay to have the funding available to pursue this strategy.
Finding, fixing and flipping homes is a lot of work, but also can be very lucrative. Putting the right team together and finding the right properties can launch your real estate investing business.
#2 – House Hacking
Another strategy is buying a small multifamily property using affordable owner-occupied financing. This is a great strategy to own rental property with probably the lowest investment of cash up front. Few people know this type of financing is available for investment property. For example, you can use an FHA loan to purchase a two to four-unit property with as little as 3.5% as a down payment. You must live in one of the units, and you can use the rental income you receive from the other units to help qualify for the loan.
After a period of time, and with a legitimate reason, you can do it again! What is a legitimate reason? Well let’s say that your commute is more than half an hour from your current tri-plex that you have owned for a couple of years, and you find a property that cuts your commute time in half. That is a legitimate reason to purchase the new property using similar financing and keep the first one, now renting out all of the units.
Those “legitimate reasons” are somewhat opaque, so a conversation with your trusted lender is in order. Done right, this is a great strategy to inexpensively build your pool of rental properties.
Turns out, a few years ago, someone coined a term for this – house hacking – which essentially means that you rent out part of the home that you live in, and you use the rent payments to offset your mortgage.
Another version is to purchase a large home rent out rooms in your house. This strategy is for the more adventurous and works great for college students whose parents don’t want to through money away paying rent, instead allowing their child to have side hustle managing the house.
#3 – Buy-And-Hold Rental Properties
When most people think about investing in real estate, they think about buying and holding rental properties. It is one of the methods of real estate investing that’s most familiar to people, whether they’re an accredited investor or not.
Buying modest homes that are in demand by renters in good neighborhoods is a proven long-term strategy towards building wealth and passive income. Most people handle the landlord duties themselves, finding and screening tenants, maintaining the property as needs arise, and doing the cleaning and spiffing up the property between tenants.
There are property management firms that specialize in single family homes, and by hiring such a firm you can have a more hands off approach, though this comes at a sizeable fee, typically 10-12% of the monthly rent, plus fees each time the property is rented, and more expensive maintenance costs.
Financing rental properties typically requires at least a 20% down payment. Depending on the cost of homes in your area, often it can be difficult to generate positive cash flow without even larger down payments.
Appreciation is where the big payoff happens, where over time the average value of homes goes up in the community. By buying in popular and sought after neighborhoods, and keeping the property in good condition, you will insure that the value of your investment rises as overall appreciation lifts prices.
#4 – BRRRR Strategy
Sometimes combining portions of these strategies can accelerate your investing accomplishments.
For example, if you buy a fixer-upper and renovate it, and instead of selling it you rent it out. Then after a few months you get a cash-back refinance loan on it, pulling out most, or even all of your cash invested back out of the property. Since you renovated the property it is likely worth quite a bit more than you paid for it.
You want to structure the deal so that the rent still pays all the bills, including the new mortgage payment. This is highly dependent on the cost of housing and rental rates in your location. Again, in high priced metros this can be difficult to pull off, but in many locales, the numbers work great!
This has been labeled the BRRRR method, where you Buy a home, Renovate it, Rent it out, Refinance the loan, pulling as much cash out as you can, and Repeat!
#5 – Private Lending
When most people think of investing in real estate, they think about owning real estate themselves. Putting in a down payment to buy a house, then building equity over time. On the flip side, investing in real estate as a lender can be a viable option.
This involves lending money to individuals, such as those looking to finance a fix-and-flip project.
If you have a full-time job and don’t have the time, skills, or inclination to take on a fix-and-flip project, you could still provide funding to someone who has the expertise but lacks the capital. For instance, you could offer to lend them the necessary funds for a period of 12 months at a 10%-12% interest rate, together with some points up front (loan fees).
They complete the renovation and sell the property (or refinance it even) and you are the first person who receives payment out of the closing from the title company or law firm. These are short term loans, so you get your money back quickly, and can redeploy into another investment as your needs dictate.
Since the loans are secured by the property in first lien position, and presumably the owner has some of their own money invested as well, your exposure to risk is relatively low.
#6 – Joint Venture Partnerships
Perhaps you’ve already invested in some single family rentals, or completed some fixer-uppers and you want to buy some larger commercial or apartment buildings. What we’ve found is that the banks and agencies that lend money for these properties require the buyers to have previous experience to qualify for the loan.
But how do you get previous experience, if you can’t get a loan to buy this type of property without it? That’s Catch 22 all over again!
The short answer is that you join others who do have the necessary experience and purchase a property together, commonly in a Joint Venture Partnership.
In fact, we did this ourselves when we purchased our first medium sized apartment building. We formed a group of four people, all with different levels of experience and investing history and purchased a 32 unit apartment in a suburb of Dallas Texas. We all brought different strengths to the partnership and shared in the responsibilities managing the asset.
In a Joint Venture, each person on the team has an active role, so there are no passive investors. The trick is finding these like minded individuals to form these partnerships with. Attending a local REIA (Real Estate Investors Association) meetings, participating in online discussion groups such as Bigger Pockets are a couple of ways to meet potential partners.
#7 – Real Estate Crowdfunding Platforms
Crowdfunding platforms are beginning to become a popular way people invest in real estate. Previously, investing in real estate required a significant amount of capital, and only wealthy individuals had access to these opportunities. However, with the advent of crowdfunding platforms, anyone can invest in real estate with as little as $500.
Crowdfunding platforms work by pooling together funds from multiple investors to finance a real estate project. These platforms act as intermediaries between investors and the real estate partnership groups, providing small investors with access to deals that they may not have been able to access otherwise. Investors can browse various investment opportunities on the platform and select those that align with their investment goals and risk tolerance.
One of the benefits of investing in real estate through crowdfunding platforms is the diversification of investment options. Investors can select from a range of investment types, including equity investments, debt investments, and hybrid investments. Equity investments provide investors with an ownership stake in the property, while debt investments involve loaning money to developers in exchange for a fixed return. Hybrid investments combine elements of both equity and debt investments.
Overall, investing in real estate through crowdfunding platforms is a compelling opportunity for investors looking to diversify their portfolio and gain exposure to the real estate market. These platforms have opened up real estate investing to a broader audience.
Here are two real estate crowdfunding platforms that offer opportunities for non-accredited investors: Fundrise’s eREIT and RealtyMogul’s MogulREIT.
#8 – Private Real Estate Syndications
Real estate syndications are an investment vehicle where a group of individuals pools their resources to invest in a real estate asset. Unlike joint venture partnerships, where all parties typically have an active role, in a syndication, most investors are passive. A small group of individuals, referred to as general partners, take on the active role in managing the investment, while the remaining investors serve as limited partners. Yes, this is primarily what we do here at Specialty Investment Group.
There is a range of real estate syndications available to interested investors, but many require accreditation due to Securities and Exchange Commission (SEC) regulations. However, there are a limited number of opportunities for non-accredited investors to invest in syndications as well.
The structure of a real estate syndication typically involves the general partners finding and managing the investment opportunity, while the limited partners contribute capital to the investment. In exchange for their investment, limited partners receive a share of the profits, typically through periodic distributions and at the time of sale. This arrangement allows investors to diversify their real estate investments and benefit from the expertise of the general partners while avoiding having to do any of the work involved with managing the properties.
Non-accredited investors may find opportunities to invest in real estate syndications that are defined by SEC rules and called 506(b) deals. However, due to the regulations, these deals cannot be publicly advertised. As a result, interested non-accredited investors must network with individuals who are part of the general partnership to gain access to such deals.
A qualifying 506(b) syndication can only accept up to 35 non-accredited investors. This means that smaller syndication investments with a limited number of investors could provide ample space for non-accredited investors.
However, all 506(b) investments, including those raising large amounts of equity, also have a limit of 35 non-accredited slots. Therefore, investors interested in such investments must act quickly to secure their spot once they become available.
Typically these opportunities have a minimum threshold of $50,000 -$100,000 investment, depending upon the total cost of the property.
Conclusions
As you can see, there are many ways to successfully invest in real estate as a non-accredited investor. The important thing is to get started. Small consistent actions over time will create big results. Evaluate what your strengths are, the skills you have or need to acquire, the time you can devote and the resources you have available, to determine the best strategy to move forward.
We’re always happy to help you on your investing journey, whether through helping you invest in deals that fit with your investing goals or connecting you with the right people and resources to help you on your way.
Feel free to reach out to us anytime!
