Alternative Real Estate Investments

by | Nov 2, 2023 | blog

Real estate is a traditionally popular avenue for investing. Statistics show that the US property market has an estimated value of $133.6 trillion and a majority of that value is from residential real estate which accounts for approximately $88.9 trillion. Between 2023 and 2028, the property industry is expected to show an annual growth rate of 4.7% which would increase the value of the real estate market to about $142 trillion by 2028. Generally, these projections show that real estate investments have the potential for steady long-term profitability.

But, like any other form of traditional investing, the value and profitability of the property market are dependent on external market forces. Inflation, fluctuations in the stock and money market, and government policies can affect the performance and viability of traditional real estate investments. Alternative real estate investments are giving investors the option to put their money in strategies that have a low correlation with the stock and financial markets and therefore considerably reduce investment uncertainties. So, what are alternative real estate investments?

What are Alternative Real Estate Investments?

Alternative real estate investments refer to non-traditional ways you can invest in the property sector beyond the typical residential or commercial real estate purchases. These range from Real Estate Investment Trusts (REITs) and syndication deals, to more niche strategies like purchasing mortgage notes. These strategies typically allow you to invest in real estate assets without actually owning physical property. Alternative investments can help you diversify your portfolio and potentially reap the benefits of real estate investing without the responsibilities and risks associated with property ownership.

What is the Difference Between Traditional and Alternative Real Estate Investments?

Traditional and alternative real estate investments offer distinct approaches to the property market. With traditional investments, you directly purchase residential or commercial properties, bearing all the responsibilities, risks, and rewards of ownership. This means you’re directly or indirectly involved in property management, maintenance, and tenant relations. On the other hand, alternative real estate investments, such as purchasing mortgage notes or crowdfunded property ventures, allow you to invest in real estate without ownership of the physical property.

Why are Alternative Real Estate Investments Attractive to Investors?

I. They Help In Diversifying Investments

Diversification of an investment portfolio remains a primary benefit of alternative real estate investments. By adding real estate to a mix of assets like stocks and bonds, investors mitigate risk and enhance the potential for better returns. This diversified approach offers a financial safety net, shielding investors from the volatility that often plagues traditional markets.

II. Alternative Real Estate Investments Can Provide Predictable Cash Flow

Stable and predictable cash flow is another advantage. Unlike the unpredictable nature of stock dividends, rental income from real estate is generally steady. Whether you invest in commercial real estate or residential properties, consistent rent payments contribute to a predictable income stream. This stability allows for better financial planning and peace of mind for investors.

A practical example would be the mortgage note investing structure CWS Investments. When you invest with CWS, your money is invested in a fund that is used to buy selected mortgage notes. In return, you are eligible for a tax-advantaged 8 – 10% annualized return which is distributed monthly.

III. Investors Can Enjoy Various Tax Benefits

Tax benefits in real estate investment are abundant. From deductions on mortgage interest to depreciation and operating expenses, these benefits can considerably reduce taxes. For instance, if you are looking for tax benefits in mortgage note investing, the CWS Investment structure may allow you to keep more of your earnings because your returns are dividends which are generally taxed lower than interests or ordinary income.

IV. Alternative Investments Can Hedge Against Inflation

Inflation typically erodes the value of money and can reduce the real returns on many investments. However, real estate often serves as a reliable hedge against inflation. As the cost of living rises, so does the value of real estate and the rental income it generates. Therefore, real estate investments can potentially protect and, in some cases, enhance your capital in inflationary times.

Alternative Real Estate Investments in 2023

Alternative Real Estate Investments in 2023

1. Mortgage Notes Investment Funds

A mortgage note is a financial instrument that represents a borrower’s commitment to repay a loan used for purchasing a real estate asset. This document contains information such as the loan amount, interest rate, repayment terms, and any specific conditions negotiated between the borrower and lender. Mortgage notes are valuable investment assets, as they can be bought and sold in the secondary market, offering investors the opportunity to earn interest income and potentially profit from the appreciation in the value of the note. These notes are secured by the underlying property, providing a level of security and collateral to the investor.

Mortgage note investment funds buy these notes from the secondary market. As an investor, you can put money in such a fund to expect a specified rate of return. For instance, CWS Investments aims to repay its investors an 8 – 10% annualized return, paid in monthly dividends.

2. Real Estate Crowdfunding

Real estate crowdfunding has transformed how local investors, including those without a real estate license, can enter the real estate business. Real estate crowdfunding websites connect real estate developers with retail investors. These platforms allow many investors, not just the wealthy, to contribute funds to real estate projects, pooling their resources for larger ventures.

3. Real Estate Syndications

Real estate syndications function somewhat similarly to crowdfunding. In this common investment strategy, a business partner or syndicator identifies a commercial real estate opportunity and invites other investors to join a joint venture. Accredited investors often dominate these syndicates, providing capital for the project, while the syndicator manages the day-to-day operations and decision-making.

4. Self-Storage Units

Self-storage units are physical properties rented to individuals or businesses for storing belongings. As an investment strategy, they offer consistent cash flow. Property management may be simpler compared to residential or commercial real estate, as there’s less wear and tear, reducing maintenance costs.

5. Short-Term Vacation Rentals

Rental properties tailored for vacationers have surged in popularity with platforms like Airbnb. Investors purchase properties in tourist-friendly locations and rent them for short durations. Local investors or those with a deep understanding of a locale often excel here, using property management services or real estate agents to handle bookings and maintenance.

Tips for First-Time Alternative Real Estate Investors

Recognize the Value of Research

Before the boom of real estate crowdfunding in the mid-2010s, the concept was largely unfamiliar to many. Yet, data now suggests that real estate crowdfunding platforms have collectively raised billions of dollars, enabling individual investors to tap into real estate opportunities previously accessible only to institutional players. Therefore, always keep an eye out for emerging opportunities, but vet them thoroughly.

Consider Historical Resilience

Alternative assets like self-storage units or mobile home parks have historically shown resilience during economic downturns. For instance, during challenging economic times, people downsize, increasing the demand for storage units. Such sectors might not be ‘glamorous’, but their consistent performance can be a valuable addition to a portfolio geared towards generational wealth.

Be Wary of Over-leveraging

Many investors were burnt in the 2008 crisis due to excessive leveraging. While taking on debt can amplify returns, it also magnifies losses. Ensure you maintain a sustainable debt-to-equity ratio, especially in alternative segments where liquidity might not be as high as in traditional real estate.

Sustainability is Key

With the rising focus on sustainability and environmental concerns, consider investments in properties or projects that prioritize green initiatives. There’s a growing segment of consumers and tenants who value eco-friendly features, which can enhance the long-term value of your investments.

Stay Updated on Regulatory Changes

Government policies can significantly impact certain alternative real estate investments. For example, short-term vacation rentals faced regulatory crackdowns in several cities over the past decade. Always be attuned to such changes, as they can influence the viability of your investment.

Network and Learn

Connect with experienced alternative real estate investors. Their insights, based on past market cycles, can be invaluable. While historical data provides guidance, personal experiences can offer nuanced lessons, helping you sidestep potential pitfalls.

Prepare for Longer Holding Periods

Some alternative investments, like raw land or certain niche properties, may have longer liquidity horizons. Align your investment strategy with your financial goals. If you’re looking to build generational wealth, patience is crucial.

Accept and Mitigate Risks

Every investment carries risk. The key is to understand, accept, and mitigate them. For instance, if you’re investing in a real estate syndication, assess the track record of the syndicator and the viability of the project. Due diligence today can prevent unwelcome surprises down the road.

How CWS Investment Strategy Can Help You Mitigate Risk

Alternative real estate investments by CWS

While alternative real estate investments can provide attractive opportunities for diversifying your portfolio and potentially achieving strong returns, they also come with inherent risks. This is also true for mortgage notes. However, CWS Investments inculcates the following risk mitigation strategies to protect from potential loss of investment capital.

  • Thorough due diligence is done on the property, the note itself, and the borrower before the purchase of the note.
  • The CWS Investments fund buys a wide portfolio of notes. Investing in the fund spreads your risk across all the available notes in the portfolio and this lowers the chances of losing money in case some notes are defaulted.
  • CWS Investments works with third-party companies that vet and assess the properties under the mortgage notes purchased. These companies ensure transparency throughout the process of restructured payments

About CWS Investments

CWS Investments is a reliable partner in alternative real estate investments. We manage a fund that purchases mortgage notes at a discount. With a team of leading investment professionals overseeing major US markets, you have the flexibility to invest from anywhere in the country. We thoroughly research, assess, and conduct comprehensive due diligence on properties, the borrowers, and the notes before purchase.

Leading our team is Chris Seveney, a real estate professional with over 25 years of experience. Chris ensures that each investment aligns with the highest standards of integrity, trustworthiness, and professionalism. Interested in understanding more about our mortgage note fund and how you can invest? Engage with a member of the CWS Investments team today.

9 Frequently Asked Questions about Alternative Real Estate Investments

1. Are alternative investments a good idea?

Alternative investments can be a good idea for many investors because they can provide diversification from traditional investments like stocks, bonds, and mutual funds. By including alternative investments in a portfolio, an investor can potentially reduce risk and increase returns. However, they are unsuitable for everyone as they can be less liquid and may require a higher minimum investment or longer holding period.

2. What are the fastest-growing alternative investments?

Over the years, private equity, real estate crowdfunding websites, and real estate syndications have seen significant growth. The rise of technology has  increased interest in diversifying portfolios, these alternative investment avenues have gained popularity among both accredited investors and the general public.

3. What are the top five alternative investment sectors in 2023?

The top five alternative investment sectors in 2023 are:

  • Alternative real estate investments like mortgage note investing
  • Private Equity
  • Real estate syndications
  • Hard money loans
  • Raw land and mobile home parks

4. What is an example of an alternative investment in real estate?

An example of an alternative investment in real estate is a real estate crowdfunding campaign, where multiple real estate investors pool their resources to invest in larger projects, such as commercial real estate or rental properties, without needing a real estate license.

5. Can you invest in US real estate as a foreigner?

Yes, foreigners can invest in US real estate. There is no law prohibiting foreign property owners. However, the process might be more complex, and there are considerations about taxes and financing. Many foreigners opt to invest in rental properties or enter real estate partnerships to generate passive income and cash flow.

6. Is a REIT an alternative investment?

Yes, a Real Estate Investment Trust (REIT) is considered an alternative investment. REITs offer a way for investors to earn rental income without actually having to buy property. They are essentially mutual funds that own and manage a portfolio of real estate assets.

7. Are REITs a good investment?

REITs can be a good investment as they offer diversification, a steady stream of income through dividends, and the potential for capital appreciation. They also allow smaller investors to invest in commercial real estate and other assets that would otherwise be out of reach. However, like all investments, they come with risks and should be researched thoroughly.

8. What are real assets in alternative investments?

Real assets in alternative investments refer to tangible and physical assets such as real estate, raw land, mobile home parks, and commercial properties. These assets can produce cash flow through rental income or commercial operations.

9. Why do people invest in alternative investments?

People invest in alternative investments for several reasons:

  • Diversification: They can provide a different asset class than traditional investments.
  • Potential Returns: Some alternative investments, like private equity real estate, may offer higher returns than traditional investments.
  • Income: Annualized dividends from CWS investments, for instance, are distributed monthly and can provide a steady stream of income for investors.
  • Hedge against Inflation: Real assets, like real estate, can act as a hedge against inflation.

Access: Platforms like real estate crowdfunding websites make it easier for average investors to access these investment opportunities.