What an Accredited Investor Is and Does
An accredited investor is an individual or a business entity that satisfies specified financial requirements. There is a definite advantage to meeting these requirements for commercial real estate (CRE) investing through syndication. Whether a syndicate investment project involves a multifamily, self-storage, retail, or other large property, accredited inventors are always welcome and needed.
According to the Securities and Exchange Commission (SEC), an “accredited investor” is an individual or entity with an annual income equaling $200,000 (or $300,000 joint income with a spouse or partner) or a net worth of no less than one million dollars. This million dollars cannot include the value of your primary residence.
Unaccredited investors who do not meet these financial qualifications are also eligible to invest in some 506(b) property offerings. Yet, these investors must be “sophisticated.” A sophisticated investor must have sufficient knowledge, training or experience in alternative investment types to make informed property investing decisions.
This investor must also have a firm, basic relationship with the investment sponsor, or general partner, in a syndication real estate investment. The sponsor will have already acquired such information as the individual’s investing experience, financial profile and goals along with their risk tolerance. While the accredited investors provide more capital for investing in a property, the sophisticated investors offer support through knowledge and alternative, yet relatable, experience as well as a smaller amount of capital.
Benefits of Being an Accredited Investor
Major benefits of becoming an accredited investor for attractive real estate deals include the following:
- Gain Greater Returns on Investment (ROI).
As an accredited investor, you can look forward to greater returns on your investment. The average ROI in the stock market is eight percent. However, some real estate development deals may return from 15 to 25 percent. The more risk you assume, the greater your return can be, yet this is an example of when to perform serious due diligence before investing.
On an investment that returns eight percent, you have the potential of doubling your capital within nine years. Yet, a property deal returning 12 percent can enable you to double your invested money much faster, often within six years. By gaining knowledge about each investment and any syndicate that you invest through, you should receive excellent ROI. Working with other more experienced investors is also very helpful.
- Diversify Your Property Portfolio
When you are an accredited investor, you can diversify your investment portfolio by adding commercial property investments. If your stock market investments should tank, your real estate holdings can help in balancing your losses. Remember to perform thorough due diligence concerning attractive large multifamily or multi-purpose buildings to determine your ideal investments.
By consulting other real estate investors who have additional knowledge about these properties, you can make good investing choices. When you invest as a limited partner (passive investor) with a successful real estate syndicate that offers these types of property investments, you should receive excellent financial returns. This can give you the best possible chance to gain that coveted ROI of 15 to 25 percent.
- Manage Greater Investment Risks
As an accredited real estate investor, you are qualified for a greater number of investing opportunities than unaccredited investors. This is because you and other investors who are accredited are considered to have the capacity to assume greater levels of risk. Many private-placements investing deals, venture capital funds and even crowdfunding property investing opportunities are open only to accredited investors.
Well-experienced accredited real estate investors understand the importance of examining investment risks before putting money into a property deal. They are also aware that the SEC sets the basic criteria for becoming an accredited investor. These seasoned investors know, however, that the REI syndicate sponsor or operator will ultimately decide whether you qualify to participate in a deal as an accredited investor.
- Gain Direct Access to Nationwide Real Estate Investing (REI) Opportunities
Investing in large multifamily, multi-purpose, retail properties or other commercial real estate through some syndicates can provide accredited investors with easy access to nationwide CRE investing opportunities. When you pool funds with other investors as a passive investor in these deals, there is no need to buy or sell according to market movement. You also have the valuable benefit of gaining more information about properties and locales that are out of your geographical region from other participating investors.
- Participate in a Large CRE Investment as an Accredited (and Passive) Investor
Successful real estate investing syndicates are always pleased when they attract accredited investors to their property deals. As an accredited investor and limited partner in a syndication property investment, your work is virtually done once you invest your capital. Regardless of the size of the property in which you and other passive investors are investing your funds, your main function and duty in the property deal is supplying the necessary capital for investing.
Although the syndicate sponsor or operator (general partner) also contributes capital, you as the passive investors (limited partners) essentially fund the investment project. Your individual income and net worth are valuable assets to this “team” of passive investors and to the syndicate participants as a whole.
- Have Direct Access to Property Developers with Deal and Property Data
As an accredited real estate investor, you can often gain direct access to property developers in areas of the country where you have an interest in investing. These property developers of large multifamily, multi-purpose of other commercial properties have property and investment deal data that can be quite valuable to investors.
Because of your interest and your status as an accredited investor, these developers are pleased to share this important information with you. This accurate, first-hand data can often be a major deciding factor in whether you choose to invest in a property deal.
An unaccredited investor seeking this same information would not have the success that you can enjoy and benefit from.
Tax Advantages for Accredited CRE Investors
Commercial real estate investing enables investors to gain valuable tax benefits. Since more commercial property investment deals are available to you as an accredited investor than to those who are not accredited, you can benefit significantly from these tax advantages. The following benefits are frequently used today by CRE investors when filing income taxes:
- Commercial Mortgage Interest Deduction. Owners of commercial real estate can claim commercial mortgage interest as a tax deduction. The amount of this deduction may even be sufficiently high to offset the tax amount due on property-generated profits. This often applies to mortgages with high-interest rates. In CRE syndication investment projects, the sponsor or operator will be responsible for acquiring the calculations needed for determining this tax deduction.
- Depreciation as a Tax Advantage. Property depreciation can be used to offset taxes due on profits generated. The IRS permits investors and owners of commercial properties to claim depreciation due to wear-and-tear as a tax deduction for 39 years. To identify cost depreciation on CRE properties for shorter time periods, investors and owners are allowed to report the findings of a study performed by an engineering firm. There are also some bonus deductions for depreciation.
- Non-Mortgage Expense Tax Deductions. Multiple commercial property expenses relative to caring for the property can also count as tax deductions. These costs include general maintenance and repairs, renovations, upgrades, management and condo fees.
Your professional tax advisor can also guide you in claiming deductions for operating expenses like travel costs to and from a property location. The amount claimed may include hotel costs and a percentage of your food and beverage expenses. Related educational expenses for events such as seminars and conventions attended may also be deductible.
- Lower Tax Rate on Capital Gains. For investors who are planning ahead for their retirement, CRE investments have additional tax advantages over the benefits that traditional IRAs offer. One of these benefits is the lower tax rate on capital gains. If you invest in commercial properties early in your investing career, this will bring you optimal gains when you retire. This tax benefit also offers some degree of security to business owners if their businesses are subject to closure.
- Tax Deferments with Section 1031. A valuable IRS code that provides tax benefits for CRE investors is Section 1031. Referred to as a “like-kind exchange,” this code enables investors to swap certain properties without the need to report a taxable capital gain. To qualify as acceptable for Section 1031, the new commercial real estate is required to be equal to or greater than the first one in value.
In addition, the investor cannot inhabit the property that they are swapping. There is no limit placed on the number of times one investor can make use of Section 1031. No taxes must be paid until a property is actually sold.
- Federal Tax Credit Programs. There are multiple tax credit programs that are provided by the federal government in the U.S. that provide advantages for CRE investors, including:
- Low-Income Housing Tax Credit (LIHTC)
- Historic Tax Credit (HTC)
- New Markets Tax Credit (NMTC)
Each of these tax credit programs is structured to provide advantages for specific purposes. Your professional tax advisor can assist you in determining whether any of these are suitable for you.
- Tax Benefits from Opportunity Zones. Another recent additional benefit for commercial real estate investors is offered by Opportunity Zones. These zones are specific areas where tax cuts are offered as an attractive incentive for real estate development and investing. The tax benefits offered include deferred capital gains tax as well as step-up or complete tax exclusions.
As an accredited real estate investor in large multifamily, retail, multi-purpose or other commercial properties, you have more credibility than investors who are unaccredited. Significantly more commercial properties are available to accredited investors than others.
In addition, your higher income and net worth are important to the overall standing of a CRE syndication investment project. Your accredited status also gives you access to property developers and owners in many areas of the country and to the valuable property information that they may share with you.
As an accredited investor in large commercial real estate, you can also benefit greatly from a number of valuable tax benefits. Many newcomers to CRE investing soon realize the true value and major advantages of becoming an accredited investor.