The Ultimate Alternative Investment
Diversify Your Portfolio with Real Estate Debt Investing
By Meredith McGowan
Unless you have been ignoring your investments and hoping for the best — which we would not recommend* — you are likely aware that the economy and stock markets have been a bit volatile of late. However, if you are looking for alternatives to traditional stock and equity investments, the aptly named alternative investments can be a great investment opportunity during an economic downturn or recession.
What is an Alternative Investment?
An alternative investment іѕ аny financial asset thаt іѕ nоt a traditional investment, such as ѕtосks, bonds, оr cash. Althоugh alternative investments have been around for centuries, options such as real estate, hedge funds, commodities, fine arts and antiquities, and venture capital have become more common and popular in recent years.
Alternative investments typically have less protections and regulations from the Securities and Exchange Commission (SEC) and may be somewhat illiquid — not necessarily the case with real estate.
Real Estate as an Alternative Investment
The key benefit with an alternative investment is the potential to generate returns not correlated with the stock market, as alternative investments are often secured by a real asset like property, wine, fine art, precious metals, or farmland.
For example, if the stock market is experiencing a downturn, alternative investments such as real estate may hold their value or even appreciate. This is because real estate is a tangible asset that is less susceptible to market fluctuations such as stocks and other securities.
While the value of stocks and other securities may drop or gain value rapidly, real estate values tend to be more gradual. In addition, real estate can provide a source of income through rental payments, which can help offset losses in stocks or traditional investments. As a result, real estate and other alternative investments can be a smart way to diversify your portfolio, as well as protect yourself from market volatility.
Historically, the average return of the stock market is about 10%. This means that if your grandfather invested $1,000 in stocks a century ago and left you the stocks in his will, the investment may be worth around $10 million today.
However, if you analyze the stock market in a time frame shorter than 100 years, you are sure to see quite a bit of erratic price performance. This is why many financial advisors recommend investors leave their money in the stock market for at least five years — enough time to ride out the ups and downs.
Real estate, on the other hand, generally offers higher yields in a shorter amount of time.
Consider the average sale price of a house sold in the U.S. during Q1 of 2017 was $374,800, vs. $514,100 in Q1 of 2022. Real estate debt investing or crowdfunded real estate investing is a strategy that allows investors to take full advantage of this appreciation. For example, if you invested $120,000 in a rehab loan with a 10% return, you would earn $1,000 passive income per month which could be reinvested in other real estate, stocks, or to treat yourself to a new jet-ski.
Real Estate Debt Investing
Now, full disclosure, the author is employed by Fund That Flip, a crowdfunded real estate debt investment marketplace, residential rehab and construction lender, and SaaS platform for rehab and construction management.
Real estate debt investing, or crowdfunded real estate investing is an alternative investment opportunity growing in popularity since Congress enacted the JOBS Act in 2012. Real estate debt investing involves investing in a mortgage, bridge financing or development loan that is funding a rehab, new construction, investment deal, or general real estate project.
Investors essentially fund a portion of the loan for the borrower, and then earn income on the monthly interest payments. This is also known as crowdfunded investing, as usually many investors purchase a fractional share of a loan to collectively fund it.
Because real estate encompasses many different types of projects (multi-unit from two to 100 doors, single-family homes, flips, new construction, commercial buildings, etc.), all over the U.S. or world, executed by numerous developers, it can be a great way to diversify your portfolio.
The Pros
» Passive income from monthly payments
» Higher returns due to appreciation and cost of capital
» Low minimum investments. The amount will depend on the investment platform and the protections required by the SEC, but the barrier to entry can be inexpensive. For example, Fund That Flip requires just $1,000.
» Diversification. Real estate happens everywhere.
» Pre-vetted by underwriters and real estate analysts. If a lender originates and underwrites its loans (like Fund That Flip), they have got skin — and risk — in the game. Their experts are trying to fund the best deals.
» Exit strategy and fixed maturity date. Lenders want borrowers to know if they are going to sell, rent, etc., and how long it will take them to do this. This gives investors greater certainty for payment.
The Cons
» Not fully secured. Even though real estate is secured by an actual property, like all investments, there is risk involved.
» Low minimum investments. Yes, it can also be a negative. Consider that the less you put in, the less you will get in return. Some platforms allow minimum investments as low as $10.
» Illiquid. While real estate offers easier liquidity management, you cannot cash out early if you need or want your funds for something else.
» Platform fees. Each investment platform has its own way of making money, including charging performance-based or usage fees. For example, Fund That Flip doesn’t charge any fees, but make sure to read the terms before you invest anywhere.
Overall, alternative investments and real estate debt investing can be great ways to weather a volatile economy and conventional investments, tying your money to a physical asset that typically appreciates in value. Plus, you have to do very little besides research a platform, talk to your financial advisor*, invest your money, and wait for the monthly payments to come in.
There are always risks with any type of investment, but there is a reason why real estate is considered one of the most lucrative and stable investment opportunities available.
*The information in this article is not investment or financial advice and is not to be taken as such.
