Real estate investing for high-net-worth individuals and couples can be a dense and intricate subject. Getting clear answers to the concerns you’ve been wondering about can be difficult, and sometimes intimidating. This article will answer some of the most common questions posed by new and experienced accredited real estate investors considering investing in real estate through alternative online investment platforms.
What is an accredited investor according to the SEC?
According to the Securities and Exchange Commission Rule 501 of Regulation D, an accredited investor is an individual who has an annual income of at least $200,000 per year, or $300,000 with a spouse. Investors with a net worth of one million or greater, excluding the value of your primary residence, also qualify as accredited investors. Being an accredited investor means you have the financial strength to tolerate the significant risk of getting involved with high-value investments. Even if you’re able achieve accredited investor status, it’s wise to carefully consider the viability, solvency, and transparency of the investment organization you work with, and the projects they sponsor.
What are the best ways to earn stable, low-risk returns as an accredited investor?
Some of the best options for accredited real estate investors include mutual funds, Real Estate Investment Trusts (REITs), and crowdfunding platforms. Each has unique benefits, returns rates, and associated risks. The benefit of these passive investment structures is that they allow you to share risk with other investors, and spread risk over multiple investments, lowering the overall risk profile.
Another advantage is that they lower the barrier to entry by minimizing the amount of funds and experience required to take advantage of the stable appreciation, relatively low risk level of real estate investments, and no requirement to participate in the management of the investments.
3. What is the difference between crowdfunding and private lending?
Participating in crowdfunding as an accredited investor, and investing as a private lender, have the same goal, but with some distinct differences in the way investments are administered, the level of risk, and the potential returns. When you venture out as a private money lender to invest directly in real estate projects, you can earn the highest return on your funds, but you bear the risk directly and will need to be more active in the oversight of the operation to ensure profitability and compliance.
Investing as a private money lender also requires much larger contributions to allow projects to be sufficiently capitalized and implemented within a reasonable timeframe. In the event of default by borrowers, it is your responsibility to seek recovery through judicial and non-judicial foreclosure methods. Partnering with other investors in pooled funding arrangements will allow you to share the risk and minimize management responsibilities.
How can I find viable investment opportunities for accredited investors?
Thanks to the advancement of online real estate investment technology, and the large supply of projects that need financing, it’s not difficult to find profitable, and pre-vetted accredited investment opportunities. Through platforms such as Sharestates and other shared-risk, portfolio diversified platforms, you can efficiently identify and obtain detailed and transparent documentation that supports the strength and validity of potential investments.
When I invest in a crowd funded project, will I be subject to personal liability?
Your personal liability as an accredited investor for civil and legal issues will depend on the degree of forethought by the real estate investment organization that you collaborate with in shared-risk investments. When investments are properly structured, you should be subject to minimal or no risk for litigation arising out of project disputes or claims. In the real estate investment business, for most legal structures that provide liability protection, such as corporations and LLCs (excluding sole proprietorship and general partnership), your risk is minimized by the corporate veil when transparency requirements are met. Otherwise, damages are limited to the equivalent of the investor’s share in the project.
What will happen if borrowers default on payments?
This is another issue that should be a key consideration is selecting an alternative investment solution or an online investing platform. One of the most attractive features of pool funding approaches is that you will not have to make direct collection efforts from defaulting borrowers. The investment organization you select will work to recover delinquent funds on your behalf, without any need for intervention on your part.
The advantage of the shared risk investing model is that due to portfolio diversification, diligent project and borrower vetting, strong returns, and the minimal entry requirements, the rare instances when borrowers default will have only a slight impact on the overall performance and risk profile of your portfolio.
What is better for an accredited investor: debt or equity investments? What’s the difference?
Debt and equity real estate investments both have their advantages for accredited investors. Debt investments are secured by notes that receive either a fixed or variable rate of return based on the degree of risk that the venture represents. In an equity investment, the rate of return is based on the amount of profit the project generates. Both forms of investment have their place and can be useful in meeting the financial needs and long-term objectives of the accredited investor.
Equity investments generally carry higher risks, and offer greater returns. Equity interests are less liquid and require a longer-term commitment, whereas debt investments typically have lower rates of return and are more readily transferrable.
What is the minimum amount that I can start investing with?
Every online and traditional investment platform has differing minimum investment requirements. The size of the fund or project, the degree of risk, and the intended market position of the organization influences the investment minimum. As an example, Sharestates has an initial $1k minimum for domestic investors, and $10k for international investors. This is based on the reasonable risk level, and our intention to make the entry into real estate investments less stressful for accredited investors.
When I invest in pooled funding projects, how is my interest secured?
Every platform has its own way of securing your interests. Common methods include debt and equity securities. The type of security issued depends on the risk level of the project and the anticipated term of the investment. Debt is typically secured by notes collateralized by real property, and earn returns at an agreed upon rate and schedule. Equity is most often secured by a contractual share in the property or venture, that earns a share of the income from the operation and resale of the property.
How will my dividends be taxed on shared real estate investments?
Equity and debt investments receive different types of tax treatments. Income generated from equity shares in an investment are typically treated as ordinary income or capital gains, depending on the structure of the investment. Proceeds from debt investments are classified as business interest and are taxed as ordinary income. As a result of the Tax Cuts and Jobs Act of 2017, your potential tax liability from both sources has been reduced.
I have more questions!
We’re here to speak with you to discuss your investment needs and goals. Please contact us by phone, email, or webform, and we’ll be happy to answer all your questions and assist you in achieving your objectives as an accredited real estate investor. As always, be sure to seek the advice of qualified tax and legal professionals before making any real estate investment decision.