6 Alternatives To Traditional Real Estate Investments

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Jan 21, 2021

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When you hear the word ‘investment’, perhaps among the common ideas that’ll come to mind is traditional real estate investment. This includes rental properties and investment trusts. They may be a widely known type of long-term investment, but they’re not the only means to invest and earn you money. 

Traditional real estate investments can be tricky and certainly not an easy feat. As an investor, you’ll be depending on rental income and mortgage-backed investments to earn dividends and profits. And as such, your revenue can be unpredictable as it heavily relies on your property’s tenants and their capacity to pay. You’d have to be strategic in managing your real estate business finances.

The future of the traditional real estate industry has a possibility to remain uncertain in the coming months or even years. Still, it can be a good investment that offers abundant yields. However, it would also be best to consider investments other than traditional real estate, especially if you’re looking into diversifying your portfolio while preserving your income.

That said, here are some alternatives to traditional real estate investments worth looking for today:

  1. Fractional Real Estate Investing

Fractional real estate investing is owning a fraction of a property and receiving its benefits as you own it. Also, you don’t have to take care of property management and anything that comes with traditional real estate, but you’ll get to enjoy all of its benefits. So, how does it work?

When a company purchases a residential or commercial property, it’ll divide the cost into fractions, which will be sold to investors. It could be a handful or thousands of investors, depending on the size of the property.

Thereafter, all investors get cash flow from the payment collected from the property. However, it doesn’t mean that every property will start earning at the same rate. So, it’s important to consider whether a property is under development or already making income.

Furthermore, fractional real estate investing is not ideal for short-term investors. It requires long-term commitments, considering their timeline of around five to years. So, if you’re looking for faster cash flow, you may consider other forms of investments to be mentioned in this article.

  1. Index Funds

If you’re living by the principle of not putting all your eggs in one basket, this alternative investment might be ideal for you. Index funds investments refer to investing in more than one stock at the same time. 

Index funds investments help you invest more in profitable stocks and less in less profitable enterprises. If you have unprofitable firms on your list, you may remove them to leave space for earning stocks. By doing so, index funds will be able to outrun individual investments steadily and significantly.

If you’re looking for an index fund to invest in, you may try VTSAX or VTI. But before you do, make sure you have an investment strategy that can help you mitigate any potential risk. Also, have a risk assessment to understand the loss you can sustain while maintaining your investments. 

  1. Farmland Investments

Investing in farmlands can offer you a better proposition compared to traditional real estate. For one, it allows investors to have access to stable growth, booming properties, and several income streams in one investment. In addition, it can also provide the benefits of traditional real estate but with a higher return rate over time.

For example, in 2010, the average cost of farmland per acre was only USD$2000, but in 2013, its value grew to USD$3000. That happened in just a matter of three years. What more if you wait for ten years?

On top of that, investing in farmlands can be extremely beneficial to investors during inflation. When there’s inflation, the value of money drops while the price of agricultural assets tends to remain stable. Or, perhaps in some cases, it may even increase. In addition, the value of whatever you grow on your farmland will increase.

  1. Commodities

Gold is a powerful commodity that can help you protect your wealth and assets, especially when there’s a foreseen economic disturbance. And aside from helping preserve your wealth, it can also be a stable income over time. 

For example, in 2016, the value of gold cost around USD$1,200 per ounce, but today, that same weight would cost around USD$1700. Of course, the price of gold has fluctuated over time. Still, the trend remains naturally upward. That’s why many investors believe that there are no losses when investing in gold and other precious metals.

  1. Private Equity

Private equity is the money you directly invest in a single or multiple companies. Unlike stocks, businesses can use these funds for potential growth and expansions, acquisitions, and sales and marketing. 

In most cases, private equity would require long holding periods, and the value of its shares would be based on certain negotiations. Also, many investors would prefer investing in private equity to investing in companies to avoid the long negotiation processes. 

When you invest in private equity firms, you’ll probably hear these two types: distressed funding and fund of funds. Distressed funding means investing in less profitable companies, hoping that they will improve over time. Fund of funds is a process of investing in private equity that invests in other assets, such as mutual and index funds.

  1. Hedge Funds

A hedge fund investment is a type of pooled investment that allows investors to gain income in any market. It is managed by professional investment managers that use different tactics that will help you beat the average returns, such as buying and trading assets. Also, investing in hedge funds can be risky and expensive.

Despite its potential risks, investing in hedge funds may help you secure long-term stable growth and increased yield. It also offers better flexibility compared to other pooled investments, such as mutual funds. 

Furthermore, the primary goal of hedge funds is to reduce risks and increase potential yield. Also, it’s worth noting that investing in hedge funds means investing aggressively. So, it’s better to have other investments to mitigate possible losses.

Final Words

Much like any investment, traditional real estate can be tricky, as it heavily relies on whether you can have your properties leased or not or if you’ll be able to collect rent. For that reason, diversifying your portfolio can be a good approach. You may want to consider the other alternative investments discussed above. 

And while they offer plenty of benefits, it’s crucial to understand that every investment has risks. Therefore, establish an effective strategy to minimize overall risks to maximize your profits. But most importantly, do your research before you make your investments.

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