Alternative real estate investments
When most people think about it invest real estaterental properties etc Real Estate Investment Trusts (REITs) are probably the first investments that come to mind. While these are popular ways to invest in and profit from real estate, they are by no means your only options, nor are they necessarily the best. This is especially true now that COVID-19 will be part of our world for the foreseeable future. Here are some of the best alternative real estate investments worth a second look today.
The central theses
- Rental properties and REITs are attractive investments, but there are many other ways to invest in real estate.
- Real estate partnerships can be a lucrative way to invest in real estate while minimizing risk.
- Impact investing provides a financial return while addressing a social or environmental issue.
- Coin loans are issued by private lenders to fund real estate projects.
- You can invest in yourself by learning a new skill or getting a license or certification.
Real estate investments and COVID-19
With millions of Americans out of work, many are struggling to make their mortgage or rent payments. That can spell trouble for rental property investors who rely on rental income to fund their own mortgages. It’s also a problem for REIT investors who rely on the performance of mortgage-backed securities and income-generating real estate for dividends.
There is a lot of uncertainty about what will happen in the housing and rental markets in the coming months. Still, real estate remains an investment that can offer lower risk, better returns, and greater diversification than the stock market. Fortunately, there are many ways to invest in real estate.
Real Estate Partnerships (RELPs)
in one real estate partnership (also called a “joint venture”), two or more investors combine resources to work towards a common goal. Ideally, each partner brings something of value to the partnership – be it an existing property, cash, expertise or effort. By joining forces, investors can collectively share risk, share responsibility and enhance potential outcomes.
“In most partnerships, the sponsor plays an active role and has the most decision-making powers,” he says Tom Blakefounder of Flexible, a technology-enabled real estate company offering a range of options to help real estate owners achieve their goals. “Limited partners or non-executive partners have little or no control, but they share in the cash flow and profits based on their investment and ownership.”
This can provide a source for investors passive income from real estate. “Because most partnership investors play a passive role, apart from the initial due diligence and review of regular status updates and sponsor reporting, investors can benefit from excellent risk-adjusted returns and little work,” says Blake.
Real estate partnerships can be a welcome source of passive income for investors.
how to start
Real estate partnerships take many forms including crowdfunding campaigns, written agreements between friends, Limited Liability Partnerships (LLPs), Limited Liability Companies (LLCs)and Joint venture (JV) Agreement. Depending on the agreement, each partner (or class of partners) may receive a different priority and share of investment cash flows. The options available to investors depend on the opportunities offered by the sponsor and the investor’s risk and reward preferences.
At the beginning you can work with a trusted friend or business partner or with a third party. Flexible, for example, partners of real estate owners who want to renovate or refurbish to increase value and cash flow. According to its website, “You bring the property and we’ll bring the money, the plans, the engineers, the construction crews, the project managers and the designers,” so you don’t have to.
With any partnership, it’s important to get legal advice when needed, make sure you trust the sponsor, and make sure your goals align with the sponsor’s business plan.
Impact Investing aim to generate a good financial return in addition to positive, measurable social and environmental impact. According to the Global Impact Investing Network, the impact investing market provides capital to address challenges across sectors including sustainable agriculture, renewable energy, conservation, and affordable and accessible basic services, including education, healthcare, and housing.
Impact investing in real estate — a subset of the impact investing sector — focuses on a variety of areas, including:
- Green Real Estate—This strategy is applicable environmentally responsible practices to exceed current building standards in terms of energy and water efficiency, less waste and safe living.
- Housing affordability—This area focuses on providing housing stocks to underserved populations.
- Sustainable Community—The goal is to design and build projects that will serve as the foundation for community growth.
Real estate accounts for a significant percentage of total assets under management for impact investing — as much as 10% to 15%, or $27 billion to $40 billion, by some estimates.
how to start
Impact investors help fund a variety of projects — such as certified green buildings, community buildings, and affordable housing — by investing in project-specific funds. First, find a company or mutual fund that focuses on an area of impact that interests you while offering an acceptable potential return. You can find these opportunities through your network, by attending meetings of local investor associations, or by searching the internet for, for example, ‘affordable housing funds’.
For example, verb house is an alternative home financing platform that combines renting and owning through a hire-purchase option to make home ownership affordable and accessible to essential workers in expensive communities (think San Francisco). Its impact investing platform enables institutions like universities and healthcare systems to set up investment funds to provide faculty and staff with an affordable way to access home ownership in the communities they serve.
“Impact investors have the opportunity to achieve social, environmental and economic outcomes that might otherwise not be possible,” he says Marjorie Scholz, Founder and CEO of Verbhouse. “As a result, impact investors can play a critical role in developing real-world solutions.”
If an investor wants to renovate a property, they can get a hard money loan (also called “bridging loan”). These short-term loans are not granted by banks, but by private investors or companies. The lender typically uses the “After Repair Value” (ARV) of the property – not just the borrower’s creditworthiness – to determine whether to make a loan. As an asset-based loan, the property serves as security.
Coin loans can be a good option for investors who want passive income with a little more yield than other passive assets like bonds or dividend-paying stocks. It’s important to know the borrower’s track record and financial health — and their ability to weather storms like the one we’re now in with COVID-19.
how to start
Private money lending is about much more than just handing over cash. For example, you must get title insurancethat protects yours lien position as a lender and provides protection against counterfeiting. They should also check the borrower’s creditworthiness and validate the borrower’s property insuranceand always have a lawyer help you with documentation.
How to start as a coin lender:
- Decide how much money you can lend and where that money will come from.
- Find an investment opportunity by networking and attending meetings at your local investment associations (it’s best to start with people you know and trust).
- Conduct your borrower due diligence and consider paying for a credit report and background check.
- Determine the loan terms, including the interest rate, interest type, repayment time, closing costs and if there is any balloon payment.
- Complete the documentation with the help of a competent attorney.
- Start collecting and maintain meticulous records.
If you’re looking to invest in real estate, it can pay off to get your real estate license even if you don’t plan to work as a real estate agent, as it offers you a variety of benefits.
Invest in yourself
Another option to consider is investing in yourself by learning a new skill or getting a new license or certification that can enhance your other real estate pursuits. For example, Many real estate investors obtain a real estate licensenot necessarily because they want to work as a real estate agent, but to take advantage of benefits such as:
- MLS Access—With access to a Multiple Listing Service (MLS)find your next business without having to rely on agents, colleagues or friends.
- Extra Income-As a broker, you can earn a commission on your real estate transactions. Depending on the number of transactions you run each year, that money can add up.
- networks—Getting your real estate license is an easy way to build your network, and an extensive network can help you find and close more real estate deals.
- More control—Representing yourself in a transaction gives you more control over the negotiations.
- Education and Resources—At the very least, getting your real estate license could improve your understanding of the industry and help you learn the lingo.
There is no state real estate license, so the time and money it takes to obtain your license will depend on your state’s licensing requirements. You can generally expect to spend three to six months getting your license, and it can cost around $1,000 to complete the pre-licensing course and sit the exam.
The final result
These are just a few of the many alternative ways to invest in real estate without going through the usual routes of buying REITs or becoming a landlord. Of course, it’s important to do your homework and research your options before risking any money. It is best to also seek advice from a qualified lawyer and tax advisor in order to avoid legal and tax surprises with your alternative real estate investment.