Although there is a lot of information about different alternative investment options, there is still a challenge of understanding their complex structures and how to maximize returns from these opportunities. So, today we shall demystify alternative investments with a bias towards the property market. Let’s begin by understanding what alternative investments are:
What are Alternative Investments?
Alternative investments are financial assets that don’t fall into the conventional investment categories you might be familiar with such as stocks, bonds, or cash. Instead, they encompass a broader range of options including alternative real estate investing, hedge funds, and commodities, among others. Unlike traditional stock or bond markets, these investments often operate outside of standard financial exchanges.
This means they can offer unique opportunities to diversify your portfolio, potentially hedging against market volatility and enhancing returns. However, it’s important to approach them with a well-informed perspective, given their unique risk and reward profiles.
The Benefits of Alternative Investments
NASDAQ projects that the value of alternative investments under management will be about $17.2 trillion by 2025. If this is accurate, this figure will have increased by up to four times since 2010. For a long time, alternative investment opportunities were mostly preserved for high-networth individuals and institutional investors. This is because of their complex nature and general lack of government oversight. But today, more investors are turning to alternative investments because of the potential for higher returns and a general consensus by investment professionals that the risks associated with alternative investing outweigh the risks associated with the stock market.
There also has been a lot of information about alternative investments that is freely and readily available for investors, which has further demystified such options. Forbes suggests that one of the reasons why investors are turning to alternative investments is because of inflation concerns and an increase in volatility of the stock market in recent years. Alternative investments, however, have a unique set of advantages that sets them apart from traditional investments. Here are some key benefits that make alternative investment opportunities attractive:
1. Investment Portfolio Diversification
One of the primary reasons you might consider alternative investments is the diversification they offer. Traditional investments, such as stocks and bonds, often move in tandem based on economic conditions, market sentiment, or global events. In contrast, alternative assets, from real estate to private equity funds, tend to have a low correlation with these traditional asset classes. By incorporating investment vehicles like hedge funds, private credit, and venture capital into your portfolio, you can achieve a more balanced asset allocation. This diversification can provide you with a safety net during volatile times, reducing the impact of market downturns.
2. Higher Potential Returns
For many individual investors, the allure of alternative investments lies in their potential for higher returns compared to mutual funds or other traditional investments. Take venture capital, for instance, where investing in startups or private companies can yield significant returns if the portfolio company becomes successful. Similarly, private equity funds provide opportunities to tap into the growth of companies that are not yet public, offering returns that might outpace the general market.
3. Hedge Against Inflation
If protecting your purchasing power is one of your investment objectives, then alternative strategies like investing in real estate or commodities can be invaluable. These assets often rise in value with inflation, acting as a natural hedge. When prices increase, the tangible value of real estate properties or the commodities you’ve invested in often rises in tandem.
4. Reduced Volatility
While stocks and bonds can exhibit significant price swings based on short-term news or trends, many alternative investments offer more stable and predictable returns. This is particularly true for assets like private debt or certain real estate holdings, which provide consistent income streams. Furthermore, alternative strategies, such as those employed by hedge funds or managed futures, can help in counterbalancing market downturns, smoothing out the peaks and valleys of your overall portfolio performance.
Alternative Investments in Real Estate
The real estate market emerges as a standout choice for alternative investments because of several compelling reasons. First and foremost, property is tangible; it’s a physical asset that, unlike stocks or bonds, won’t vanish due to market volatility. This tangible nature inherently offers a buffer against inflation ensuring that your investment has a chance to appreciate over time. Additionally, the property industry has witnessed consistent growth, with rising property values and rental incomes acting as a testament to its resilience and potential for robust returns.
What’s even more enticing for investors is the expansive variety of alternative investment options within real estate. From mortgage note investing and crowdfunding platforms to real estate syndications, there’s a fit for every risk appetite and investment goal. Moreover, the evolution of alternative investment avenues has democratized real estate investing. Gone are the days when hefty capital was the entry ticket to the market. Now, with innovative platforms and strategies, even those with modest funds can stake their claim, making real estate investing more accessible and widespread than ever before.
4 Alternative Investment Opportunities in Real Estate With High-Yield Potential
Always keep in mind that while the rewards can be significant, so too can be the risks. Transaction costs can be higher, and some alternative assets might not have an active secondary market, impacting liquidity. As always, partnering with a knowledgeable financial advisor can help align these unique opportunities with your broader financial goals.
1. Mortgage Note Investment Funds
Instead of owning the actual property, have you considered investing in mortgage notes? A mortgage note is a legally binding financial document that represents a borrower’s promise to repay a specific amount of money borrowed to purchase real estate. It outlines crucial details of the loan, including the principal amount, interest rate, repayment schedule, and any other terms and conditions agreed upon between the borrower and the lender. These notes are secured by the underlying property, providing a degree of collateral and security to the investor in the event of borrower default. Mortgage notes can be bought and sold in the secondary market, offering opportunities for income generation through interest payments and potential capital gains. Investment companies like CWS Investments create a fund that buys these notes at a discount.
2. Commercial Real Estate Investing
Beyond residential properties lies the vast realm of commercial real estate. Here, you’re looking at office spaces, warehouses, retail units, and more. The beauty of commercial real estate lies in its potential for longer lease durations and stable rental income. While the initial investment might be more significant than residential real estate, the returns, both in terms of appreciation and rent, can be highly rewarding for the informed investor.
3. Vacation/ Short-term Rentals
The rise of platforms like Airbnb has revolutionized the potential of short-term rentals. Investing in properties in tourist hotspots or areas with regular events can lead to impressive nightly rates. And while the thought of consistent bookings and high rates is enticing, remember that this investment type requires active management, or at least partnering with a management company, to ensure guest satisfaction and regular maintenance.
4. Real Estate Syndication
Consider this as pooling resources and expertise. Real estate syndication is a collaborative approach where multiple investors come together to invest in larger properties or projects that might be beyond their individual reach. By joining a syndicate, you benefit from the knowledge and experience of seasoned professionals while reaping the rewards of large-scale real estate projects. It’s a shared-risk, shared-reward system that broadens your real estate horizons.
Mortgage Note Investing: An Investment Opportunity That Makes a Difference
Some homeowners are unable to pay their mortgage installments due to job loss or extended periods of illness. For lenders (typically banks) the only way to handle such default is to foreclose the property and eventually evict the homeowner. Alternatively, because the bank is usually eager to recoup its investment on the mortgage, they sometimes find a less legally cumbersome option like selling the mortgage note to funds like CWS, at a discount.
In the case of CWS Investments, they purchase the note at a discount and renegotiate a new structure of payment with the homeowner. So, instead of the homeowner paying their installments to the bank, they will be paying the investment company. As an investor of the fund used to buy the notes, you can earn between 8 – 10% annually, distributed through monthly dividends.
This alternative is convenient for both the bank and the homeowner. The bank will recoup their investment and the homeowner will be given a chance to get their life back on track so that they can continue with the restructured payment. This means that they will not be facing foreclosure or eviction. If this seems like the type of opportunity for you, then contact CWS Investments today.
Other Popular Alternative Investments
Each of these opportunities presents a unique way for you to delve into the real estate world, offering varied levels of involvement, risk, and potential return. As always, understanding your investment goals and risk tolerance, combined with thorough research, is key to finding the right fit for your portfolio. Investing in real estate comes with tax depreciation benefits, while certain private equity or hedge fund structures might offer opportunities for tax deferrals. However, it’s essential to consult with a financial advisor familiar with these intricacies to ensure you’re maximizing benefits while remaining compliant with applicable laws.
Hedge Fund
Hedge funds stand out due to their speculative investment practices, like short selling or other strategies not commonly found in traditional portfolios. Managed by seasoned hedge fund managers, these funds can invest in everything from public companies to commodities. Though they may offer diversification benefits, they also come with significant risks. They might not adhere to the same regulatory requirements as other investment products, so it’s essential to thoroughly understand their key characteristics and strategies.
Venture Capital
Are you intrigued by startups and innovation? Venture capital investors put their money into early-stage companies, banking on their growth potential. Unlike private equity which might invest in established businesses, venture capital zeroes in on younger companies with the hope that one becomes the next big thing. While this form of investing can be highly rewarding, it’s also risk-laden due to the unpredictability of startups.
Peer-to-peer Lending
Straying from the traditional banking system, peer-to-peer lending allows you to lend your money to individuals or small businesses online. In return, you receive interest payments, making it an avenue to generate income. However, this form of direct lending differs from investing in liquid assets like stocks or bonds. It’s essential to understand the risks, especially around default rates.
About CWS Investments
Would you like to learn more about mortgage note investing? Let’s introduce you to CWS Investments, a trusted alternative investment partner. With a team of top-tier professionals across all major markets, you can confidently invest from anywhere in the U.S. At the helm of CWS is Chris Seveney, a seasoned real estate expert with over 25 years under his belt.
Chris is known for his deep-seated professionalism and sheer determination, He ensures every investment is handled with utmost integrity. Do you want to know more about our mortgage note investment fund? Reach out to a member of our team today.
12 Frequently Asked Questions about Alternative Investment Opportunities
1. What is an example of an alternative investment?
Examples of alternative investments include real estate, private equity, hedge funds, commodities, precious metals, art, antiques, and collectibles.
2. Is ETF an alternative investment?
ETFs, or Exchange-Traded Funds, are generally not classified as alternative investments themselves. However, there are ETFs that specifically track alternative assets, such as commodities or real estate, thereby giving investors exposure to alternative investments through a more traditional investment vehicle.
3. What are alternative income investments?
Alternative income investments refer to non-traditional ways of generating income beyond stocks and bonds. Examples include real estate rentals, peer-to-peer lending, and investments in dividend-yielding private companies.
4. Is crypto an alternative investment?
Yes, cryptocurrencies like Bitcoin, Ethereum, and many others are considered alternative investments. Their value is not tied to traditional financial markets, and they often behave differently from stocks, bonds, or other traditional assets.
5. Is Forex Trading an alternative investment?
Forex trading involves the exchange of currencies and is typically seen as a speculative activity rather than a traditional investment. Due to its speculative nature and differences from traditional stock and bond investments, Forex can be considered an alternative investment.
6. What are the risks of alternative investments?
Alternative investments can present various risks, including higher fees, limited liquidity, lack of transparency, more complex tax structures, and higher volatility. They may also be less regulated than traditional investments, leading to additional potential uncertainties.
7. Who should invest in alternative investments?
Investors seeking diversification, higher returns, and those who understand and are willing to accept the additional risks associated with alternative investments may consider adding them to their portfolio. This often includes institutional investors, high-net-worth individuals, and experienced retail investors.
8. How much should you invest in alternative investments?
The appropriate allocation to alternative investments varies based on individual risk tolerance, investment goals, and financial situation. Consulting with a financial advisor can help determine the right mix for an individual’s specific circumstances.
9. Are alternative investments the future?
While it’s hard to predict the future, alternative investments continue to gain popularity as investors seek diversification and potential high returns. They provide opportunities beyond traditional markets, but whether they are “the future” depends on evolving market dynamics and individual perspectives.
10. What are the fastest-growing alternative investments?
In recent years, areas like private equity, real estate crowdfunding, peer-to-peer lending, and cryptocurrencies have seen significant growth. However, the fastest-growing sectors can change based on market trends and economic conditions.
11. How big is the market for alternative investments?
The alternative investment market has been growing steadily, with assets under management (AUM) in the trillions. This figure includes a wide range of assets from hedge funds and private equity to real estate and commodities.
12. Is Gold an alternative investment?
Yes, gold is considered an alternative investment. Precious metals like gold are often viewed as a hedge against inflation and currency fluctuations and don’t correlate directly with stock or bond markets.
