Raising Private Money: Why You Should Work With Accredited Investors
Raising private money is one of the fastest ways to grow and fund your real estate investment business. Whether you have maxed out your current credit, need money for another down payment, or want to fund your next real estate deal completely through non-traditional sources, raising private money can be the answer. It is one of the fastest ways you can take your business to the next level.
While everyone you meet is a potential investor, not all potential investors are alike. Don’t be that guy who leaves his real estate seminar and runs out and gets Granny to invest her retirement in your first house flip. That is a recipe for disaster. Instead, let me suggest an alternative route that is good for you and the potential investor. When raising money from private investors to fund your real estate deals, use Accredited Investors.
Accredited Investors are those who have either achieved a high net worth or earn a high income on an annual basis (Accredited Investor qualifications are toward the bottom of this article). Generally speaking, accredited investors are people who have disposable income that they can invest without having to count on it to live on or that they have to get back right away. They are great potential investors for your business not only because they typically have extra money to invest, but also because they usually understand investments, risk/reward, and require less legal work and training on your part to educate them on your investment.
6 Reasons why you should work with Accredited Investors:
- They are typically more knowledgeable in the arena of making money in investing and will require less education from you.
- They understand risk/reward and have more reasonable return expectations.
- They understand that you are going to make money out of the deal also.
- They typically have more disposable income to invest and don’t need to be repaid as quickly.
- The legal rules are more lenient in working with them, which in turn requires less legal work from you.
- It normally takes fewer of them to fund your deal.
What Are the Accredited Investor Qualifications?
Accredited Investors are great to work with, but you have to make sure your potential investor qualifies. Accredited Investor qualifications are set by the Securities and Exchange Commission (SEC). In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following (for a complete listing of the qualifications, visit the SEC website here http://www.sec.gov/answers/accred.htm):
- He or she must earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
- He or she must have a net worth exceeding $1 million, either individually or jointly with his or her spouse (not including their personal residence).
In order to use the investor’s funds, you need to verify that they are in fact an Accredited Investor. You can do that by having them fill out a brief questionnaire like the one we have here. Make sure you keep a copy of the completed qualification form in your records and document your contact with potential investors. Also, when in doubt, it’s smart to have your Securities attorney review your money raising practices and materials. They can help make sure you are following the rules and keep you out of trouble.
Raising private money is one of the fastest ways to fund your business and help take it to the next level. You want to work with knowledgeable potential investors with disposable income. The Securities and Exchange Commission calls these investors accredited investors. Accredited investors understand investing and require less education. They can be easier to work with and require less legal work to comply with SEC regulations. Once you make sure that your potential investor is qualified, you can move quickly and get your real estate investment deals funded.