Benefits to Being an Accredited Investor

What Does it Mean if You Qualify as an Accredited Investor? 

All stock exchange investments, including Real Estate Investment Trusts (REITs), require SEC oversight. Indeed, there's no getting away from the requirement that companies trading their equity in a public forum must attain SEC registration, with some exceptions. The latter term - exceptions - ushers in a stream of options, including real estate opportunities, under the marketplace heading "alternative." Over time, the regulatory bodies governing alternative investment protocols have insisted that entities entering these opportunities qualify prospects as "accredited."

So, why would someone want to be accredited if there is so much SEC regulation available with traditional retail investing? 

The answer to this question is that accredited investor opportunities offer extraordinary rewards and tax benefits outside the traditional SEC governed options. There are several ways to become accredited, but that's not the focus of this article. We've covered that in past and upcoming blogs. 

Accredited Investor Benefits

In this article, we drill down to see the options and opportunities. The benefits boil down to: 

  • Significantly higher yields in real estate investments, mainly when adding tax credits one can't obtain with registered SEC-classified categories. For example, REITs distribute profits only as dividends, which doesn't permit special allowances or deductions around tax payable. 
  • Growth rates in small private businesses generally exceed the more mature massive enterprises under the SEC umbrella. Accredited investing embraces small and medium business initiatives with groundbreaking companies uncovered by regulatory due diligence.
  • The diversification possibilities are massive. Accredited investments provide a wide activity channel that gives interested parties entry into global projects far removed from SEC jurisdiction. 
  • Alternative investments connect to managers demonstrating unique perspectives, skills, and undeniable competence

As a backdrop to the above, the SEC implies that if you want peace of mind, its oversight cuts out unconventional or unorthodox methods. In short, the SEC and its regulatory counterparts restrict the investment path to keep all parties (i.e., managers and investors) on the straight and narrow. As a result, many see this as a cautionary signal, dissuading people from considering non-regulated assets. 

On the other hand, accredited investors are primed and ready to do their own due diligence. They don't view the lack of rules as a significant obstacle. Numerous high net-worth individuals don't shy away from innovations, new concepts, and startups. Indeed, they want more of them, predicting outsized performance and returns in the cards. 

Accredited investors - often running their own businesses - regularly compliment managers on the lengths they take to establish and maintain transparency. A well-known hedge fund manager who only deals with an accredited audience explains it like this: "It's not to say that "alternative" equates to wild-west tactics and sketchy reporting. Managers in many funds are as professional, if not more so, than their counterparts governed by SEC guidelines." 

Unfortunately, some of the best opportunities are invisible because they're flying under the radar, only attracting attention when people in the know point them out to us. 

The Range of Accredited Investments

The accredited investment sphere is a gigantic field surrounding art, antiques, commodities, managed futures, currency trading, and crypto positions, to name but a few. Here, we will embrace the following:

  • Venture capital (or angel investing)
  • Hedge funds
  • Real estate syndications
  • Commercial real estate opportunities
  • Real estate crowdfunding (including farmland)
  • Kona Estates - a luxury development in Hawaii capturing intense investor attention.

Venture Capitalists (VCs)

VC investing represents a fast-paced, aggressive field - not for people who don't understand probabilities or want every deal to pay its way. Why? Because it's where startups begin their trajectories, often sputtering and coming to a disappointing and sometimes screeching halt. Specialist VC operators represent substantial funding resources as the following reflects:

  • Hillhouse Atlantic ($30 billion assets under management)
  • Hillhouse Capital Group ($30 billion)
  • Insight Venture Partners ($18 Billion)
  • Iconiq Capital ($14.5 Billion) 

They understand how to play the VC and Angel Funding game as experienced professionals, thus attracting multiple insurance institutions, pension and endowment funds. Their mindset focuses on backing a hundred fledgling businesses via a series of cash injections with the expectation that between five and ten take off (even though the majority crash and burn). The bottom line is that it usually suits those with an inside track to go on this roller-coaster ride that's inevitably a significantly lucrative option in the right hands.

Hedge Funds

We're talking here about massive private investment partnerships. It's not too far removed from the VC space (described above) but connected to a different manager outlook. Leaders in the hedge fund category frequently include:

  • Contrarians going against the tide
    • For example - shorting popular stocks when everyone else is going long
  • Out-of-the-box thinkers who excel at finding engaging, innovative concepts. 
  • Pioneers and inventors, in many respects, earning exceptional rewards if their horses finish the race. 

Perhaps it's unfair to imply that a “gamble” is at play when investing in hedge funds. The latter’s managers are, as a rule, astute individuals going into a competitive event with the odds loaded in their favor. As a result, they've caught the attention of other more traditional institutional investors seeking diversification of five or ten percent of their portfolios.

Some of the significant hedge funds include powerhouses like Blackrock Advisors (controlling nearly $800 billion in assets), AQR Capital Management ($164 billion), and Bridgewater Associates.

Real Estate

Individual accredited investors - as opposed to the institutional types - gravitate toward real estate. It makes sense because it represents tangible assets that are easy to see, touch, and feel. Also, although it's not a REIT, it doesn't differ all that much from managing one. The managers' credentials are easy to understand and appreciate. In many cases, the investors have managed real estate personally and take to the theme. 

Of course, it's not to say institutional money doesn't travel this route; it does and with significant momentum. However, it's a broader vertical in the accredited space than the VC and hedge fund options. Let's look at some unique opportunities emerging in the real estate arena:

Real Estate Syndications 

Syndication is the heading that covers a system of getting investors to pool their resources with a sizable, focused objective in the crosshairs. Investor syndicates can access excellent opportunities as passive partners in LLPs. The sponsor entity functions as the project’s general partner. 

Syndication applies to residential and commercial property verticals where developers read the demographic data and know where the economic activity will take off. Thus, they earmark land or buildings in up-and-coming locations, then attract investor funds to realize new development, fix-and-flip, or fix-and-rent visions. In addition, passive partners in these ventures can take advantage of:

  • Significant tax allowances unobtainable in REITs.
  • Ability to reinvest their original funds again and again in similar ventures alongside delaying tax assessments for years.

It's pretty common to reach for IRRs (internal rates of return) of over 20% without counting in the added tax benefits. 

Commercial Real Estate

The term "commercial" is a staple property category that accredited investors from all walks of life cannot resist. It doesn't stand exclusively apart from syndications, as there are many of the latter focused on commercial assets. Also, it parallels REIT activities (i.e., SEC-regulated) in the following (to mention a few):

  • Office buildings
  • Medical centers
  • Shopping malls
  • Hospitality (restaurants and hotels)
  • Factories
  • Warehouses
  • Self-storage facilities.  

The US property markets are genuinely diverse. As a result, locking in with an expert in a unique commercial channel can make a huge difference in return. Indeed, niche opportunities hold rich rewards that only those operators immersed in the field can detect and capitalize on. For example, a niche such as advancing first mortgage secured loans, which:

  • Earn upfront fees and double-digit interest rates as hard money lenders. 
  • Create lucrative returns for conservative accredited investors.

Real Estate Crowdfunding (Commercial and Farmland)

This is a new and novel way to raise funds, one that's getting significant and fast traction. It's a compelling option because it gives ordinary people with accredited status first dibs at properties that only institutions traditionally get a look at. Moreover, the advantages appeal to investors who understand they are pooling their contribution: 

  • Usually via an online financial technology (i.e., fintech).
  • To make an eventual capital gain or/and ongoing profit.
  • With dollar inputs far less than most structured syndications require:
    • Sometimes only a few hundred dollars is all it takes to get started
    • With the promise of relatively higher than REIT returns.
    • Offering a measured diversification in unique options that can range from rural farmland to remote islands
    • Taking management hassles out of the equation for passive crowdfunders.

The pitfalls are as follows:

  •  Anything this new requires extraordinary due diligence. Manager competence and history are the primary scrutiny items.
  • Extra tax deductions are unlikely if profits are in dividend form (likely).
  • Reporting protocols, transparency, and exiting can be iffy.

Of all the opportunities in this article, those under this heading are the riskiest. However, in cases where general partners with glowing track records offer a crowdfunding option (versus traditional syndicated projects), it may be worth a second look.

Kona Development Partners: A High End Development Checking All the Crucial Accredited Investor Boxes

As we mentioned earlier, many lucrative opportunities fly under the radar. We believe this is one of those iconic opportunities. There's no need for crowdfunding vehicles or trying novel fundraising methods for this development. Instead, the sponsors let the real estate proposition speak for itself as it drums up a swelling demand from the accredited investor ranks. 

Location

We're talking about the Kona coastline in Hawaii, with spectacular beaches, world-class surfing, and five-star accommodations. Property values in the state are spinning off the charts. Still, Kona uniquely offers accredited investors who want to get in at the early stages an excellent ROI opportunity.

Investing in Kona Development Partners, LLC (Kona): the Critical Facts to Know

Zillow shows that Hawaii property values increased by 21% year-on-year in February 2022. However, Kailua Kona rose by a whopping 32% over the same period. It signifies that the region is no longer awaiting discovery. Indeed, it's on the map and taking off. 

  • Most projects offered to investors outside of REITS rely heavily on mortgage funding. Conversely, Kona has zero construction debt on its books, meaning that:
    • The underlying capital is 100% equity and under the control of the syndicate's investors.
    • The partnership is not beholden to an outside funder. 
  • Moreover, the general partners have an impressive history with over one billion dollars in real estate projects under their belt:
    • They have leveraged their experience to launch the Kona Estates at Opihihali an extraordinary super-luxury home development.
    • Every home is built with fastidiousness and enjoys incredible views. 
    • In short, it represents the stunning homeowner lifestyle visitors from around the world can't resist at relatively reasonable price points. 
  • The company has attached an enticing investor package that makes it one of the most attractive projects in any arena (accredited or SEC-governed). Look what you get in this private fund:
    • An expert team that knows everything about constructing luxury residences.
    •  A scaled-up project that covers general contracting, land appraisal, and property management impeccably.
    • Affordable $50,000 investment units with no limit on the number you can acquire.
    • An underlying guarantee that the general partners cannot draw a dollar of benefits until at least returning the investors' total capital. 
  • The Kona team believes that a 27% IRR is in the cards.
    • Not counting exceptional tax reductions that a Section 506 C arrangement configures for its members. 
    • Kona follows a policy of full transparency, thus encouraging your CPA to take advantage of every tax reduction opportunity. 
  • The open declaration policy also runs through the partnership memorandum. Everything is in the formula to create maximum peace of mind.

Conclusion

In 2022, accredited investors in the US will have access to an exciting opportunity range, from VC initiatives and hedge funds to numerous real estate ventures. Syndications are popping up in every state, but none more compelling than the Kona project in Hawaii for residents and visitors. The latter checks all the critical boxes vital to peace of mind and an excellent return for as little as $50,000.