A Clear and Simple Guide to Alternative Real Estate Investments
December 13, 2022
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Investing in houses is a time-tested way to grow wealth over the long term and diversify one's portfolio. Alternative real estate investments can be an approach to portfolio diversification because they can provide access to unique opportunities and strategies not available through traditional investments.
This guide explores why real estate is seen as an attractive alternative investment. We’ll explore the various options available, such as private equity, real estate partnerships, crowdfunding, and investing in the debt side of real estate.
Additionally, we’ll address the potential risks and rewards associated with alternative real estate investments so you can make informed decisions about your financial future.
Why Is Real Estate an Alternative Investment?
Real estate can be an attractive option for investors looking to diversify their portfolios. It offers the potential for long-term capital appreciation and a steady stream of income through rental payments.
Furthermore, real estate has had historically low correlations with traditional investments such as stocks and bonds, providing portfolio diversification benefits that may help reduce an investor’s overall risk.
Also, real estate can provide tax advantages for investors, such as deductions for mortgage interest payments and depreciation expenses. Plus, unlike traditional investments, owning real estate offers tangible assets that can be leveraged as collateral or sold down the road.
Benefits of Alternative Investments
Alternative investments in real estate can help broaden your portfolio and increase your potential returns. Unlike stocks, real estate is a tangible asset you can physically interact with, helping make it a more concrete investment. In addition, real estate usually appreciates over time and may provide a steady income stream.
Alternative investments like real estate can also provide excellent tax benefits. Depending on how you structure your investment, you can keep more profits by using a 1031 exchange to grow your investments tax deferred. You can also invest in real estate by converting some of your 401k or IRA funds into a self-directed IRA (SDIRA) for real estate.
Traditional Real Estate Investments
Investing in traditional real estate deals doesn't necessarily mean you need to invest a lot of cash. Some conventional real estate investments include REITs, REIGs, rental properties, and mutual funds. REITs and real estate crowdfunding require little money to start and can provide decent returns.
Real estate investment trusts (REITs) are made when a company owns and operates income-generating residential and commercial property. The two common types of REITs are equity REITs and mortgage REITs.
Publicly-traded REITs are similar to stocks because they can be found and traded on public exchanges. They are also usually registered by the SEC; however, some REITs may be registered but listed privately as "non-traded" REITs.
Real estate investment groups (REIGs) are great for investors who want to own a rental property without the responsibility of being the landlord. REIGs are similar to small mutual funds for rental properties.
A company will purchase one or more properties, such as single-family rentals, apartments, or commercial properties like office buildings. Then, investors can join a REIG and contribute capital to the group.
Investing in rental property involves purchasing a home, making any required updates and needed repairs, and renting it out. You can decide if you want to lease it out to tenants long-term or as a short-term vacation rental. You may choose to self-manage it or hire a property management company.
Rental properties may provide several potential benefits: generating rental income, increasing value over the long term, and tax deductions from operating expenses, mortgage interest, and insurance.
A real estate mutual fund is a type of investment vehicle that pools funds from many investors to invest in real estate assets. As a result, they may provide investors access to diversified real estate portfolios that may not be available to them as individuals.
Additionally, because mutual funds operate on economies of scale, they may offer investors lower fees than if they were investing directly into individual properties or other forms of real estate.
Alternative Real Estate Investment Structures
Some alternative real estate investments use a partnership structure with both a general and limited partner. While sole ownership in real estate is a common choice, there are also several different investment structures you can choose from to meet your goals and tax requirements.
You can apply any of these structures to your property since the investment structure is usually the only thing that changes, not the property itself.
Private Equity Funds
Private equity funds are investments structured as a pool of capital used to buy shares in private companies and other real estate-related assets, such as distressed commercial properties.
Investors may benefit from the fund's ability to potentially generate higher returns than most traditional investments due to more favorable terms on debt financing, access to exclusive deals, and the expertise of experienced professionals managing the portfolio.
General and Limited Partnerships
These alternative real estate investments involve two parties, a general partner and limited partners. The general partner is responsible for making decisions about the investment, while the limited partners provide capital to invest but do not have any decision-making power.
As a result, the general partner typically receives a larger return on the investment than the limited partners, but both benefit from potentially higher returns due to the collective expertise and resources of the partnership.
Crowdfunding is an alternative real estate investment done through online platforms that connect investors to real estate projects they can invest in.
Investors benefit from having access to projects they otherwise may not have been able to participate in and potentially higher returns compared to traditional investments. However, investors need to do their research before investing since there are risks associated with this type of investment structure.
Alternative investments used to be for high-net-worth individuals and accredited investors. However, companies like Concreit are now making private equity real estate accessible to all investors. Concreit uses a cash flow strategy that, historically, has been used by hedge funds and private equity funds for wealthy investors.
Concreit makes it easy to invest in what works best for you and your investment objectives. The highly rated app gives you real-time updates on your account, portfolio, and asset-level information.
Some other benefits investors receive with Concreit:
- Get paid more frequently than other platforms with weekly dividends; the average annualized return has been 5.5% over the last year.
- Cash out any time after an initial 60-day settlement period, with no minimum investment time required.
- Invest confidently on a platform managed by a team of experts with over $10B in asset management experience, and who carefully select each investment for the portfolio.
Investing in Real Estate Debt vs. Equity
When investing in real estate, some people prefer to invest in a tangible piece of property, while others prefer to lend money to those looking to buy property. Both strategies have advantages and disadvantages, but it ultimately depends on what is best for you.
Alternative real estate investments on the debt side involve lending money directly to real estate developers or purchasing mortgage-backed securities. These investments may offer more consistent returns than traditional or alternative real estate investments.
Unlike owning physical real estate, which is subject to market conditions and tenant turnover, debt-based investments are typically secured by the underlying assets and can generate more predictable returns.
Risks of Alternative Real Estate Investments
Alternative real estate investments can be attractive for investors due to their potential for more consistent returns than traditional investments, but they also present unique challenges and risks.
Because alternative investments involve a wide range of asset types, investors must understand the associated risks before making any decisions.
Property Market Risks
Change in the property market is one of the most common and significant risks associated with alternative real estate investments. As with any investment in physical property, there is always a risk the market will change, and factors beyond your control may impact value or rental income. Understanding local markets and trends is essential when considering this investment.
Many alternative real estate investments are illiquid, making it difficult to convert them into cash quickly. That may impact your ability to take advantage of market opportunities or make changes to your portfolio promptly.
Although real estate investments are intended to be a long-term commitment, you may prefer a real estate strategy where you can quickly access your funds. Concreit allows investors to request a withdrawal of funds anytime.
Regulatory and Legal Risks
Alternative real estate investments often involve complex legal structures and agreements, so there is a greater risk associated with potential violations or misunderstandings. Therefore, working with experienced and reputable professionals is important when considering any alternative real estate investment.
How to Minimize Risk with Alternative Real Estate Investments
By understanding the risks associated with alternative real estate investments, investors can ensure that they are making informed decisions regarding their portfolios. Working with experienced professionals and researching local markets can reduce some risk while taking advantage of the potential rewards.
To minimize risk when investing in alternative assets, investors should diversify their portfolios across multiple asset classes and sectors. Diversification helps to spread out the risk associated with each asset class so that if one sector performs poorly, it minimizes the impact on the overall portfolio.
Additionally, investors should thoroughly understand any investment before committing their funds. That means researching the asset class, understanding how it can fit into their overall investment strategy, and being aware of the potential risks involved.
By following these best practices, investors can help ensure that their alternative investments are as low-risk as possible.
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.