Alternative Real Estate Investments

What they are and how to invest in them

Reviewed by JeFreda R. Brown

When most people think about real estate investing, rental properties and 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. That’s especially true now that COVID-19 will be part of our world for the foreseeable future. Here are some of the top alternative real estate investments worth a second look today.

Key Takeaways

• 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.
• Hard money loans are issued by private lenders to help finance 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 bank on rental income to cover their own mortgages. It’s also a problem for REIT investors who rely on the performance of mortgage-backed securities and income-producing real estate for dividends.

There’s plenty of uncertainty about what will happen to the housing and rental markets in the coming months. Still, real estate remains an investment that can offer lower risks, better yields, and greater diversification than the stock market. Fortunately, there are lots of ways to invest in real estate.

Real Estate Partnerships

In a real estate partnership (also called a “joint venture”), two or more investors combine resources to work toward a shared goal. Ideally, each partner brings something of value to the partnership—whether that’s an existing property, cash, expertise, or effort. By joining forces, investors can collectively spread risk, distribute duties, and improve potential outcomes.

“In most partnerships the sponsor plays an active role and has most decision-making rights,” says Tom Blake, founder of Flexible, a tech-enabled real estate company that offers a menu of options to help property owners reach their goals. “Limited partners or nonmanaging members have little or no control, but they share in the cash flow and profits, based on their investment and ownership.”

This can give investors a source of passive income from real estate. “Because most partnership investors have a passive role, investors can get the benefit of excellent risk-adjusted returns and little work, aside from initial due diligence and reviewing regular status updates and reporting from the sponsor,” says Blake.

Important

Real estate partnerships can provide a welcome source of passive income for investors.

How to Get Started

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) agreements. Depending on the arrangement, each partner (or class of partners) may receive a different priority and share of investment cash flows. The options available to investors are driven by the opportunities offered by the sponsor and the investor’s risk and reward preferences.

To get started, you can partner with a trusted friend or business associate or with a third party. Flexible, for example, partners with property owners who want to renovate or redevelop to increase value and cash flow. According to its website, “You bring the property, and we bring the money, plans, engineers, construction crews, project managers, and designers,” so you don’t have to.

With any partnership it’s essential to seek legal advice when needed, make sure you trust the sponsor, and ensure that your goals are aligned with the sponsor’s business plan.

Impact Investing

Impact investments aim to produce good financial returns alongside positive, measurable social and environmental impacts. According to the Global Impact Investing Network, the impact investment market provides capital to address challenges in various sectors, including sustainable agriculture, renewable energy, conservation, and affordable and accessible basic services, including education, healthcare, and housing.

Real estate impact investing—a subset of the impact-investing sector—focuses on a variety of areas, including:

• Green Real Estate—This strategy applies environmentally sustainable practices to outperform current building standards in terms of energy and water efficiency, reduced waste, and safe housing.
• Housing Affordability—This area concentrates on providing housing inventories to underserved populations.
• Sustainable Community—The goal is to design and build projects that serve as foundations for community growth.

Real estate accounts for a substantial percentage of total reported impact-investing assets under management—as much as 10% to 15%, or $27 to $40 billion, by some estimates.

How to Get Started

Impact investors help finance various projects—such as sustainably accredited buildings, community buildings, and affordable housing—by investing in project-specific funds. To get started, find a company or investment 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 local investor association meetings, or by doing an internet search for, say, “affordable housing impact fund.”

For example, Verbhouse is an alternative home finance platform that combines renting and owning through a lease-purchase option to make homeownership affordable and accessible for essential workers in high-cost communities (think San Francisco). Its impact-investing platform enables institutions such as universities and healthcare systems to establish investment funds to offer faculty and staff an affordable way to access homeownership in the communities they serve.

“Impact investors have the opportunity to generate social, environmental, and economic outcomes that may not otherwise be possible,” says Marjorie Scholtz, founder and CEO of Verbhouse. “As a result, impact investors can play a vital role in bringing forward real-world solutions.”

Hard Money Loans

When an investor wants to renovate a property, they may obtain a hard money loan (also called a “bridge loan”). These short-term loans are issued by private investors or companies instead of banks. The lender typically uses the “after repair value” (ARV) of the property—not just the borrower’s creditworthiness—to determine if they will issue a loan. As an asset-based loan, the property serves as collateral. 

Hard money loans can be a good option for investors who want passive income with a little more yield than other passive assets, such as bonds or dividend stocks. It’s important to know the track record and financial health of the borrower—and their ability to weather storms, such as the one we’re in now with COVID-19.

How to Get Started

There’s a lot more to private money lending than simply handing over cash. For example, you need to get title insurance, which protects your lien position as a lender and provides protection against forgery. You should also review the borrower’s credit, validate the borrower’s property insurance, and always get an attorney to help you with the documentation.

To get started as a hard money lender:

1. Decide how much money you can lend and where that money will come from.
2. 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).
3. Conduct your due diligence on the borrower and consider paying for a credit report and background check.
4. Determine the loan terms, including the interest rate, interest type, time for repayments, closing costs, and whether there’s a balloon payment.
5. Complete the documentation with the help of a competent attorney.
6. Start collecting and maintain meticulous records.

If you want to invest in real estate, it can pay to get your real estate license, even if you have no plans to work as a real estate agent, because of the variety of benefits it gives you.

Invest in Yourself

One other option to consider is to invest in yourself by learning a new skill or getting a new license or certification that can enhance your other real estate activities. For example, many real estate investors get a real estate license, not necessarily because they want to work as as a real estate agent but to take advantage of benefits such as:

• MLS access—With access to a multiple listing service (MLS), you can find your next deal without having to rely on agents, colleagues, or friends. 
• Extra income—As an agent, you can earn a commission on your real estate deals. Depending on the number of transactions you execute each year, that money could add up.
• Networking—Getting your real estate license is an easy way to build your network, and having an extensive network can help you find and close more real estate deals.
• More control—If you represent yourself in a transaction, you have more control over the negotiations.
• Education and resources—At the very least, getting your real estate license could jumpstart your understanding of the industry and help you learn the lingo.

There’s no federal real estate license, so the time and money that it takes to get 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 might cost around $1,000 to take the prelicensing course and sit for the exam.

What is Short-Term Rental Investing?

Short-term rentals are properties that are rented out for short stays, typically a few days or weeks. Platforms like Airbnb allow property owners to connect with renters looking to stay in a property for a short stay. While short-term rentals carry more risk and have higher maintenance and upfront costs, they can also generate higher returns in less time than traditional rentals.

Do Manufactured Homes Generate Value?

Historically, manufactured and mobile homes do not hold value over long-term horizons. The real value generated from investing in mobile homes comes from the value of the land that the mobile homes sit on. Many real estate investors have begun investing in mobile home parks, which rent out land to mobile and manufactured home owners.

What is Real Estate Crowdfunding?

Real estate crowdfunding ventures pool capital from investors to invest in properties. Crowdfunding investors don’t have to purchase an entire property to invest, allowing them to generate returns for relatively little upfront cost. Popular real estate crowdfunding sites include Fundrise, RealtyMogul, and Arrived.

The Bottom Line

These are just a few of the many alternative ways to invest in real estate without tapping the usual routes of buying REITs or becoming a landlord. Of course, it’s essential to do your homework and research your options before putting any money at risk. It’s also best to consult with a qualified attorney and tax accountant to avoid any legal and tax surprises with your alternative real estate investment.