Differences Between Accredited Investors and Sophisticated Investors

One of the best ways to become a real estate investor is through a process known as syndication. Syndication is an investment strategy where a group of investors pool capital to acquire more significant multifamily properties than they would qualify for individually.

In return, each investor creates passive cash flow, builds generational wealth, and adds value to the community without the need to manage day-to-day property operations. Yet, some group investment opportunities are only available for specific types of investors, most notably those with an accredited or sophisticated investor designation.

Here is what you should know about investor designations so that you can participate in your first syndicated real estate deal.

What is an Accredited Investor?

Your average person contributes to a retirement account through work or has a standard brokerage account they add money to every month. Retirement account investing makes it simple for individuals to grow wealth for retirement since all the securities sold in brokerage accounts complete a U.S. Securities and Exchange Commission (SEC) registration process.

Yet, many types of investment opportunities are available from businesses that do not register their securities with a regulatory authority. Because of this, the SEC set laws to protect investors from the risks inherent in these ventures.

So, what does this have to do with the title of accredited investor? And what does it mean to be one? Individuals and organizations that sell unregistered securities must only sell to accredited investors, according to SEC regulations.

An accredited investor is privileged access to unregistered securities because of their net worth and income level. The SEC sets rules limiting average investors from buying unregistered securities because there's risk involved, and they want to protect a non-accredited investor from making complex financial decisions.

According to Securities Act Rule 501, an accredited investor must have an annual income of $200,000 as an individual, or $300,000 if married, for the past two years. They should also expect to earn the same level of income over this year. However, those are not the only qualifications you should meet. In addition, you should have a net worth that exceeds a million dollars, excluding your primary residence.

Furthermore, even business entities can have an accredited investor designation. If an entity has over $5 million in assets and accredited investors own 100% of the business, then the commodity can invest in unregistered securities.

What is the Definition of a Sophisticated Investor?

Now, in addition to accredited investors, there are also sophisticated investors. According to the SEC, a sophisticated investor is an individual that has enough experience or knowledge in a business to evaluate the risks and merits of an investment. Generally, sophisticated investors will also meet the income and net worth requirements of an accredited investor. However, they are more knowledgeable about financial markets and therefore have access to advanced investment opportunities. 

Are You Ready to Become A Real Estate Investor?

If you want to participate in multifamily real estate syndication and you believe that you meet the qualifications of an accredited or sophisticated investor, let’s discuss your goals. Thomson Multifamily Group has over a decade of experience helping investors build wealth by scouting, acquiring, and investing in multifamily real estate. Learn more about our Syndication Investor Group.