Welcome to The Get Real Podcast, your high-octane boost and in the trenches tell-it-like-it-is reality therapy for personal, business and real estate investing success with your hosts, power-preneurs Angela and Ron. It’s time to get real!

Angela: Hi and welcome to The Get Real Podcast. This is Angela Thomas and I am here with Ron Phillips. Hey Ron.

Ron: Get real.

Angela: Let’s get real. Yeah. So today, Ron, we’re going to talk about being an accredited investor. What that means, why you’d want to be one, how to get there. What, what was that?

Ron: Are you one? If you are one, what do you do about it?

Angela: If you are, what do you do about it?

Ron: What difference does it make?

Angela: Yeah. So, so let’s get going.

Ron: I mean, I think it should be, it should be fun, should be a fun topic. I think for everybody. There’s probably a bunch of people out there who you’ve never heard of accredited investors before and probably didn’t know that there was such a class of investor or that there were classes of investors at all really.

Angela: You would think if you had the money there would just, you would, just have access to all the deals, right? That’s what I would think if I didn’t know any better.

Ron: Right. I mean if the investment’s a couple hundred thousand and I’ve got a couple hundred thousand dollars to invest, you should. That is not the case however. There is in the SEC rules, that’s the Security Exchange Commission, the SEC rules… there is a class of investor called an accredited investor and certain offerings cannot be made to anybody other than accredited investors. And for the majority of my life I did not even know that existed. So my guess is there’s of bunch of people out there who didn’t know who don’t know as well. There’s probably some accredited investors out there who don’t realize that they’re accredited investors… crazy! It’s not like you get something in the mail one day where they go, hey…

Angela: Congratulations.

Ron: Boom, here you go.

Angela: That would be nice.

Ron: It’s kind of like when you lived in Vegas and they have those clubs and restaurants out there where you have to be somebody to get in the door, they have the rope and there’s a bouncer guy.

Angela: There’s one key difference there, Ron. So with the cool, you know, exclusive clubs and restaurants in Vegas, if you’re an attractive girl and you dress hot, you can get in even if you don’t, you’re not part of the club. So I don’t think it works like that with investments.

Ron: It’s not the same.

Angela: It’s not the same, what.

Ron: Maybe I meant like, I don’t know, a golf club or, or something.

Angela: Oh, okay. Yeah, yeah. Golf clubs are a little different.

Ron: It’s more that. I’m sorry, I just pictured the SEC as the big bouncer, but I didn’t realize they were going to let it in hot chicks.

Angela: The SEC doesn’t, they don’t care.

Ron: They don’t. By hot chicks, they mean people who’ve made the accredited investor rules, which there are. So we talked about those?

Angela: Yeah, definitely.

Ron: I mean, they change them occasionally. The most recently changed the rules after, I think after the last downturn to the current rules which are, you have to make, there’s an income and then it’s or a net worth, right? So it’s income or net worth. And then there’s some other ones that pertain to companies and retirement associations, things like that. We’re not going to get to go into all that stuff because it doesn’t pertain to nearly anybody who’s on here. But if you make $200,000 a year as a single person or $300,000 a year, if you’re married, then you’re an accredited investor or if you have a network of a million dollars or more. But that does this, and this is the piece that they changed. It used to be just a million dollar net worth, but there were so many people who had a million dollar net worth because they owned real estate in California or on the west coast, or on the east coast and well they kind of lost a whole bunch of money because they were accredited investor or by, not because they were not because they knew what they were doing because they owned the house, that’s it really. And so now the new change is you have to have a million dollars in net worth, not counting your primary residence, so you can count second homes and third homes and fourth homes, but not your primary residence, all your income properties count. So you just have to have a net worth of over a million dollars or you have to hit the income requirements.

Angela: So Ron, why you seem to know a lot about this, why did the government even set up those rules? Like why does it matter?

Ron: Well, it was all set up after the, a big huge stock market crash in the 19 twenties. So the SEC was set up in the thirties, I don’t remember exactly what year it was set up in the thirties. And then they started coming up all these rules because a bunch of people got, you know, quote unquote taken advantage of, lost a whole bunch of money and it’s not unlike what happened after this last crash. The crash happened and so what did the government do? Well, they came in and they started really hardcore regulating a whole bunch of things in the real estate world and in the banking world. Some of those things had not the greatest of, I mean there’s unintended consequences any time you start jacking around with the free market, right? Don’t get me started on that. That’ll be an hour long rant about how the government is meddling in our affairs.

Angela: It might be funny and it would be real.

Ron: It would be real.

Angela: I think it would be funny.

Ron: I don’t know, it might not be safe for work. I’m not sure.

Angela: We could edit it, it’s ok, just kidding . Anyway go ahead.

Ron: So anyway, the government to protect people from losing their entire livelihood. I mean that really what it was put in place for, for a couple of reasons. You know, they assume that people who have that much money or that make that much money know what they’re doing. It’s been my experience that’s not accurate all the time, now sometimes it’s accurate, but sometimes it’s really, really bad.

Angela: Having a high paying job doesn’t necessarily mean you know how to tell if an investment’s good or not. It doesn’t always translate.

Ron: Not at all, not at all. But there’s the government trying to make something that works when it doesn’t. But the second thing, I understand, and the second reason is if you have a substantial net worth, the odds of whatever investment, this is completely annihilating your life financially it’s lessened, let me put it that way. I mean, you can still be imprudent with your money and you can invest all of your net worth as an accredited investor and you can lose it all so it can still happen. But this is to protect the little guy, the guy who doesn’t have, a guy or gal out there who doesn’t have a whole lot of money to lose from unscrupulous people or just really risky investments even if the people aren’t unscrupulous, right? So that’s what, it’s there for, that’s why it came about. That’s why it’s there and those are the rules.

Angela: It does make sense.

Ron: And it’s really simple, it’s pretty black and white. You either make 200 or $300,000 or you have a net worth of a million bucks or more and you’re in the club. You don’t even have to wait for the invitation.

Angela: So say I just figured out listening to this, Ron, that I am an accredited investor and I want to start seeing those deals. Where do I even go about finding them? I mean, how do you let people know you don’t get something in the mail saying you are one. So how do you send out an announcement that you’re ready for the deals you know?

Ron: The people who, the people who have the deals don’t get an invitation to your party either that you just, you just became one. You have to go seek out these opportunities. Obviously there’ll be people out there who will be marketing them. The, the rules for advertising, these types of investments have been loosened over the last few years, which makes it so that you can see things, even if you’re not accredited, you can see things on Facebook that are suggesting, hey, this is what I do. I have, I syndicate money to go buy apartment buildings or you know, I’ve got this company that I’m starting or whatever, you just won’t see any of the details and there’s a process whereby they’re going to go through to make sure that you’re an accredited investor before they give you the diesels, but at least they should. There seems to be a whole lot of people out there raising money that should be using private placement memorandums and should be using offering memorandums and they’re not.

Angela: So you still got to be really careful even if you are the smart accredited investor, a cool club, right.

Ron: Exactly, exactly.

Angela: So I am not in the accredited investor club and I want to get there. So, I mean, my plan to get there is, I mean I have an awesome job at this company and I’m starting to invest in single family homes and my plan is to let those grow, let my net worth grow with those and reposition with a 1031 into multifamily. And from there when my net worth is high enough, I will be able to access those accredited investor deals. So I just wanted to tell everyone out there. I mean, there’s multiple ways to get there, that’s my plan. Ron, I’m sure yours was a little bit different. Your business was involved, right?

Ron: Yeah. I mean if you’re a business owner out there, your business has a worth, it’s part of your net worth, right? So if your business would be valued at more than a million dollars, then you would be, you would be considered an accredited investor as part of your assets. So it’s all of your assets, you know, I can’t list them all for you, but you guys know what your assets are. If your assets equal, minus your liabilities, your net worth equal a million dollars or more than you’re there and if you’re not quite there, then you can acquire some more assets. Given some time those assets will hopefully grow, won’t lose value.

Angela: Ron, can you talk about, I know you are there, sorry I didn’t mean to interrupt you, but can you talk about like why, why you’d want to be there? Why are these deals so much better? Why are they hidden or why are they cool? What’s the point?

Ron: Let’s be clear. Some of them are that much better and some of them are better at all then the stuff you were just talking about, Angela. The family deals or duplexes or small multifamily stuff that you could, you can get into and that’s where you need to be, you need to understand how to read the private placement memorandum because in there it’s going to, it’s going to go over, you know, kind of the offering, the terms, the risk factors and you know, if it’s anything like the ones that I put together, the risk factors, I mean, there’s a huge list if you read all that and you still want to invest afterwards, you really want to invest because that stuff like you put everything that could possibly go wrong. So anyway, kind of description of the company, the management, how all that’s going to work, how the proceeds work. So when money’s come in, how they get distributed, description of the securities that they’re there and any exhibits that go along with it. And so it’s, I mean it’s quite a packet. And you need to be able to look at that and you need to be able to look at the actual investment, the business, the property, whatever it is that they’re raising money for and determine whether or not it’s a good investment and you still have the burden to go out there and look just like you do if you’re buying a house, you have to be able to look at the numbers and you have to be able to dissect those and make sure that this is going to be a good investment for you. You know, so that, that doesn’t change. But what it does allow you to do is it allows you to look at deals that you otherwise wouldn’t have had the opportunity to look at, because the people who have these offerings and they can be very lucrative, you know, some of my buddies and I do these as well, you know, you go out and buy apartment complexes and then you can either, rehab them or you can just make changes in the management.

Ron: And we’ll probably do another segment on, on multifamily properties, but there can be an upside of millions of dollars in one of those properties. And usually the way these work is that the investors, the money investors, they get what’s called a preferred return. So they get, of the money that comes in of the cash. Let’s say the property made $200,000 this year and there were 20 investors, of that $200,000 that came in, there’s going to be a piece of that, a percentage that gets paid out to the investors first. So they get the first money that comes in before the operators or the managers of that fund get paid. Does that make sense?

Angela: That’s one of the huge benefits in my opinion, is you still can make great returns in these bigger deals, but when you’re part of a fund like that and you have a preferred return, there’s a lot less or at least a little less leg work involved, right?

Ron: Yeah. So it’s literally a hands off passive investment money give you money and I’m going to expect a return and then what the private placement does or the offering memorandum that it lined out, how things get paid out. So for instance, if you, if you had one that was paying out a 10 percent preferred return, for instance, that 10 percent preferred return would be it would be paid out on a quarterly or monthly or annual or however it’s going to be paid out. And then after that there’s usually some kind of a piece of the upside in the property. So that big chunk that I was telling you about. So you know, if the property makes $3,000,000 and you get a 50 percent of the upside, all of a sudden the investors made a million and a half to split between them plus whatever the preferred return was that they were getting.

Ron: So it’s a way to participate in larger deals and it’s a win win for everybody because the guys who are going out there and they’re finding these deals, if they have to use their own capital to fund every one of the deals, it constricts the amount of deals that they can do and it’s, so it’s a win for them, but it’s also a win for the money because usually the people that have the money either don’t have the time or don’t want to spend the time putting together the deal, or they lack the expertise to put together the deal and they get a handsome return to utilize their money, right.

Angela: Awesome. Cool. So there’s definitely advantages but you kind of want to know what you’re doing because you know, the return, I mean, there, there’s a lot of cool things about them, but you could possibly lose a lot more money.

Ron: Yeah. Listen, anytime you’re putting up big money into something that is paying higher returns, there’s a risk reward, right? There’s also, you know, offerings for, businesses IPO’s and things like that. Yeah, everybody’s heard of IPO’s before. But those things are also offered to accredited investors and those are even more risky because they’re a startup venture. People raise money for apps, you know, for all kinds of things nowadays.

Angela: They sure make it look cool on TV though, you know, investing in all those companies, who doesn’t want to do that?

Ron: I want to see the TV show where they, where they say how many of those work duds and how many of them actually were actually winners and then, and then what the payoff is on the back end.

Angela: Hey on that Marcus Lemonis show. What’s it called?

Ron: The Profit. He actually put them on there.

Angela: The Profit, yeah. He actually had a couple episodes where he went through how many, how many were duds, and how many made money and it’s not as many as you would think, but he’s still doing alright.

Ron: Yeah, he did. He did really well in the IPO’s, but it was kind of a gamble. That’s a perfect example. So if Marcus was out raising money to go and put money into those businesses, he would need to put out a private placement memorandum because he’s selling a security. I guess that’s another thing we should say, right? You don’t need a private placement memorandum, like Angela, if you and I are going to go buy an apartment building together, I don’t need to put together a private placement memorandum to go do that was just a partnership you and I are just going to go buy real estate, but it changes when I’m selling shares in a company, all of a sudden now it’s a security because I’m selling shares in the company. That’s why you need to go out there and put together a private placement memorandum because I’m no longer selling real estate selling shares in the company.

Angela: Yeah, makes sense. Cool. Alright, well thanks Ron and yeah, if you guys have any questions or comments about accredited investing or anything else or any suggestions on what you would like us to talk about in the future, please visit, GetRealEstateSuccess.com and let us know. We’ll look forward to, we look forward to you guys been on next time. Thanks.

 

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