Nonaccredited Real Estate Investing: Yes, You Can Invest in Real Estate!
If you’ve seen ads for real estate investments, or any other form of investing, you may have seen the term “accredited” before. Some investment opportunities will only be for “accredited” investors which are 506(c) offerings. Unfortunately, this leads some people to believe that they cannot invest in real estate when they can (after all, “accredited” sounds like something you earn or apply for). Nonaccredited real estate investing is possible for everyone; however, you need to know the difference between accredited and nonaccredited investors and investments to know which opportunities are open for each!
So, if you’re wondering what the deal is with this whole “accredited” thing, here’s your complete guide to investing in real estate – accredited or not!
Nonaccredited Real Estate Investing: What Is Accreditation?
Before diving into how to invest in real estate if you are nonaccredited, it’s first essential to review what, exactly, accreditation is.
No, it’s not something you apply for or even a class you take!
The SEC’s job is to protect investors by ensuring that all investment opportunities are genuine and legal. They also need to protect investors by ensuring that people don’t unknowingly invest in risky opportunities for their overall financial health.
To facilitate these goals, the SEC created a rule that automatically classified investors into two categories: accredited and nonaccredited. The word “automatically” is there because there’s nothing to apply for – your status as an “accredited” investor automatically applies if you meet at least one of two criteria:
- You have a net worth of $1 million or more, not including your primary residence (cash, stocks, bonds, investment properties, etc., all qualify).
- You have made at least $200k ($300k joint with your spouse) in the past two years and have a reasonable expectation of making that moving forward.
If either of the above applies to you, congratulations, the SEC says you have your accreditation!
The SEC views “accredited” investors as being able to withstand financial loss better, and thus being “accredited” opens the door to riskier investments than, say, buying Apple stock.
How Does Accreditation Affect Investing?
Accreditation opens up more investment opportunities than being nonaccredited. In particular, the SEC gives accredited investors the option to purchase securities exempt from registration with the SEC itself.
For example, when you buy stocks, those publicly-traded companies must register their securities with the SEC. They must file numerous reports on financial, board of director changes, etc. All publicly-traded securities are heavily regulated.
However, what happens if you want to invest in a small business? Maybe there’s a diner down the street that you want to invest in to get a 25% equity stake. That diner, certainly, won’t register with the SEC!
That’s where accredited investing comes into play. That diner could solicit investments from accredited investors but not nonaccredited ones. Since their securities are not with the SEC, they must seek accredited investment.
(Note: this is a simplification of the law designed to make it easy to understand – in real life, there are many nuances.)
Therefore, accredited investors can invest in everything – and our favorite 506c real estate syndications! Nonaccredited investors can only invest in opportunities that don’t require accreditation.
Nonaccredited Real Estate Investing: Is It Possible?
With that background in mind, as you might imagine, when someone solicits investors in a new apartment building, they must often be accredited. However, as with most laws, even that’s not always the case (we’ll detail more shortly)!
There are many different forms of real estate investing, though. Many of them are open to nonaccredited investors. Here are five real estate investments that you can make even if you are nonaccredited!
Real Estate Syndications
First, real estate syndications are one of the premier ways to invest in real estate. Syndications are private companies that let investors partner up to facilitate a large-scale real estate transaction.
So, instead of one person owning a $50 million apartment building, perhaps 100 people invest $100,000 each. The syndication uses that $10 million in capital to put a 20% down payment on that $50 million apartment complex to buy it. Indeed, it’s easier to find 100 investors willing to put $100k in than it is to find one $10 million investors!
Wait, aren’t these unregulated securities as per the SEC? There are no registrations or requirements for these non-public companies. How is that a nonaccredited real estate investing option?
The answer lies in a nuance of the law. A nonaccredited real estate investment opportunity is a 506(b) deal named after the section of the statute that authorizes it. Syndications under this law cannot publicly advertise their securities, so it is required that the sponsors (people putting the syndication together) have a preexisting relationship with the investors in the deal. 506(b) deals can have up to 35 nonaccredited investors. A minor deal will have plenty of room, while you may have to jump quicker for a more significant investment opportunity because those will fill up fast.
If you’re willing to network and seek out people in the industry, it’s relatively easy to connect with people who have or know of a nonaccredited real estate opportunity! With returns of 8%-10% per year for five years (the average length) and a 30%-40% return on equity at the end sale, syndications can double your money in five years. They typically represent one of the best, if not the best, way to invest in unaccredited real estate.
Buy and Hold Rental Properties
Perhaps the most straightforward and intuitive investment opportunity for someone who doesn’t have accreditation is buying and holding rental property. Indeed, you don’t need any special designation to buy the condo or home down the street and rent it out to tenants.
Of course, that’s a good thing because buying and holding rentals is a fantastic way to build your net worth! Typically, property values appreciate, and you can create a steady monthly income stream!
The only downside is that you’re on the hook for anything that goes wrong! And, you need to handle all your tenants’ inquiries – even at 3am – or hire a property manager to do so (which can become pricey, depending on the area).
Buying and holding rental properties is perhaps the most straightforward of all the unaccredited real estate investing options!
You’ve undoubtedly seen or heard of all the flipping shows on TV. Shows like Flip or Flop show how “easy” it is to buy a distressed home, put a lot of work into it, and sell it for a considerable profit.
Part of the reason these shows are all over is that flipping does work – mostly. You can find homes cheaply, renovate them, and sell them for a tidy profit if you know where to look.
However, if you go behind the scenes on these shows, you’ll often realize that these investors do much of the work on their own. Or they have a dedicated team of employees to work on these projects. They’re not paying Lowe’s or Home Depot markups on all labor and materials!
Therefore, flipping houses can work, but there is some risk, and it can also be incredibly challenging to find deals at low cost in today’s hot market. And, you’ll need to put in a lot of work yourself to get the home ready to sell!
The BRRRR strategy marries buy-and-hold and fix-and-flip to create a new repeatable process to build wealth through nonaccredited real estate investing.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. The idea behind this strategy is to keep doing the following steps in succession:
- Buy a single-family home or condo that needs some work.
- Rehab it to make it both rentable and increase the home’s value.
- Rent it out.
- Refinance the property to pull out as much of your initial capital as possible.
- Repeat the process (use that capital to buy a new home, rehab, rent, refinance, and repeat).
In theory, if you could always pull out 100% of your initial capital, you could build nearly unlimited passive income streams of rent. When executed correctly, the BRRRR strategy is a powerful way to build wealth and is an un-accredited real estate investing opportunity!
Real Estate Investment Trusts, or REITs, are an excellent un-accredited real estate investing choice. So far, all the methods have required a relatively substantial amount of capital to execute. You’ll need enough money for a down payment on a home or condo.
What if you don’t have that saved up yet but still want to invest in real estate?
That’s where REITs are powerful. REITs are companies that focus on real estate and trade on standard stock exchanges. You can buy them in your 401(k) or through any standard brokerage account. These companies typically purchase and run malls, shopping centers, apartment buildings, and other large-scale real estate investments.
Just like all the other real estate methods, you will receive regular dividends representing the rents that tenants pay. The dividend payouts on these investments tend to be higher than many other stocks.
Since many REITs trade at even as little as $5-$20 a share, these stocks give anyone with a brokerage account the opportunity to diversify their portfolio and own real estate!
Nonaccredited Real Estate Investing: Yes, It Is Possible
Despite what you may read online, investing in real estate is possible even if the SEC doesn’t classify you as “accredited.” There are five ways you can invest in real estate: buy and hold, flip, BRRRR, REITs, and syndications. All have their pros and cons, but, on the whole, syndications are typically the best investments!