Investing in real estate has long been seen as a smart way to build wealth. Unlike traditional investments like stocks and bonds, real estate offers unique advantages that can lead to substantial financial gains.
According to a CAIS and Mercer survey, 85% of financial advisors have and will continue to advise their clients to invest over 10% of their portfolios in alternative investments across 2024. This shows a strategic shift towards diversifying portfolios beyond just stocks and bonds.
This overview will explore why real estate is considered the premier alternative investment and how it can help you achieve your financial goals.
What are Alternative Investments in Real Estate?
Alternative investments refer to classes of investment instruments which are not conventional stocks, bonds and cash or Near Money Instruments such as CDs. They can present various prospects and/or threats in contrast to the conventional investment possibilities.
Examples of Alternative Investments
- Private equity
- Private debt
- Commodities
- Precious metals
- Cryptocurrency
- Art and collectibles
- Fine wine
- Infrastructure
- Structured settlements
- Trade and marine finance
- Litigation funding
- Venture capital
- Hedge funds
Types of Alternative Investments
Alternative investments can generally be grouped into two main categories:
1. Less Frequently Traded Assets
These include real estate, private equity, and private debt. These assets are not traded as often as traditional stocks and bonds and can be more complex to invest in.
2. Alternative Strategies in Public Markets
This category includes venture capital and hedge funds. While they might operate within traditional public markets, they use unconventional strategies like extreme leverage and short selling to try to generate higher returns.
Investing in Real Estate
Investing in real estate offers various avenues depending on your risk tolerance, investment horizon, and financial goals. Here are some common ways to include real estate in your investment portfolio:
1. Direct Ownership
This involves purchasing physical properties such as residential, commercial, or industrial real estate. Investors earn income from rent or capital appreciation. However, direct ownership requires active management and maintenance.
2. Real Estate Syndications
Real estate syndications have emerged as an interesting opportunity for investors with a net worth of $1 million or higher, commonly referred to as “Accredited Investors,” who want to capitalize on the high return potential of real estate but who don’t want to be landlords.
Syndications allow investors to pool their resources and collectively invest in large-scale properties, benefiting from the expertise of experienced syndication sponsors while generating passive income.
3. Real Estate Investment Trusts (REITs)
REITs are publicly traded companies that own, operate, or finance income-generating real estate. They offer a passive way to invest in real estate, which provides the benefits of property ownership without the need for direct management.
REITs offer liquidity like stocks but typically have higher management fees and lower returns than Real Estate Syndications and Direct Ownership.
4. Real Estate Crowdfunding
Crowdfunding platforms allow investors to pool their resources to invest in real estate projects. This method provides access to real estate investments with lower capital requirements, which makes it easier for smaller investors to participate.
5. Real Estate Mutual Funds or Exchange-Traded Funds
These funds invest in a diversified portfolio of real estate assets, offering exposure to the real estate market without owning physical properties. Real estate mutual funds and ETFs provide a more hands-off investment approach and can be easily traded on stock exchanges.
3 Reasons why Real Estate Is a Good Alternative Investment
Real estate being a part of the private capital and private debt is often referred to as one of the least risky forms of the work of the alternative investment funds (AIFs) within the framework of certain classes of the associated objects.
They can give better returns and steady revenues and can also act as a shield during the period of recession.
1. Income
Real estate generates recurring cash flow from rents and dividend distributions. High-quality real estate investments often provide stable income streams that can be more attractive than government bonds.
2. Appreciation
Real estate can appreciate in value over time. For example, self-storage facilities can adjust rents monthly, keeping pace with inflation and market demand, unlike long-term residential or commercial leases.
3. Stability
Adding real estate to an investment portfolio can create stability. The steady income from rents, asset value growth, and inflation hedging characteristics make real estate a reliable investment through various economic cycles.
Why Invest in Public Real Estate Now?
Real estate investment can be considered a valuable opportunity now, given the high inflation rate and central banks beginning to constrict the money supply, further increasing today’s already high interest rates.
This has caused a phenomenon of valuation collapse with REITs being significantly below the value of the commercial properties they own.
For instance, the industrial and apartment sectors have high rent renewal rates, low vacancies and high demand and thus belong to the good sector.
This makes the commercial real estate listed on the public market ideal for investors in search of inflation protected stocks with upside growth potential.
Benefits of Alternative Real Estate Investment
Traditional investment strategies like the 60/40 allocation of stocks and bonds may no longer suffice in today’s market. Alternative investments, such as commercial real estate, offer several advantages:
- Increased Income: Alternative investments can boost portfolio income levels.
- Reduced Volatility: They often exhibit lower volatility compared to stocks.
- Improved Returns: Alternatives have the potential to enhance overall portfolio returns.
According to BlackRock, global trends like technological innovation, urbanization, sustainability, and competitive dynamics are driving investors to diversify into alternative assets.
These trends suggest that alternatives could offer superior returns and stability, especially in comparison to traditional stock and bond allocations.
Risks and Considerations of Alternative Real Estate Investing
Investing in real estate can provide diversification and attractive returns, but you must understand the associated risks:
- Illiquidity: Real estate investments can be less liquid than stocks and bonds, which makes it challenging to convert them into cash quickly.
- Market Fluctuations: Real estate markets can experience price fluctuations, which affects the value of your investment over time.
- Property Management: Direct ownership requires active management, which can be time-consuming and requires expertise in property management.
- Location Risk: The performance of real estate investments is heavily influenced by the property’s location and local economic conditions, posing risks if local markets experience downturns.
These factors highlight the importance of thorough research and understanding the dynamics of real estate markets before making investment decisions.
Diversify Your Portfolio with Passive Real Estate Investing Today
Real estate also belongs to the most legal source of extra-market investments which provide diversification, income, and protection from inflation.
Hence, adding to the existing investment portfolio through Direct Ownership, Real Estate Syndications, REITs, Crowdfunding or fund helps reduce risk and increase returns’ value.
As you explore real estate investing, remember to conduct thorough research, assess your risk tolerance, and define clear financial objectives as you consult with your tax advisors, financial advisors, and legal professionals who are experienced in real estate investments.
Ready to take the next step? Contact us today to explore real estate investment opportunities for Accredited Investors to passively participate in Precision Global’s syndications. Together, let’s build a prosperous future.
Disclaimer:
Please note that Precision Global Corporation (PGC) is not a certified public accountant (CPA) firm, and the information provided in this article should not be considered as professional tax advice. Content provided by PGC is for general informational purposes only.
Tax regulations vary by location and can change over time. It is recommended to consult with a qualified CPA or tax advisor who is knowledgeable about the specific tax laws applicable to your situation. They can provide personalized guidance tailored to your circumstances.
Precision Global Corporation does not accept liability for any actions taken based on the information presented in this article. For accurate and personalized tax advice, please consult a local CPA or tax professional.
