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Why You Should Be Thinking About Alternative Investments

In uncertain times, financial advisors often encourage investors to turn to low-risk, fixed-income investment options, such as CDs, money market funds, and high-yield savings accounts. They reason that these safe investments will preserve your assets as they provide positive returns. But do they?

Investing in the stock market and receiving a 60% loss is a no-no, so the financial advisors would rather you invest on a 10-year treasury yield, making 3.7%. While it may seem the investment is making you money, you have to consider that the annual inflation rate rose to 8.2% in September 2022. That means you are losing money (-4.5% annually).

While all investment options seem pointless at the moment, one criminally underutilized segment is viable during market downturns. Did you know you can make as much as 12% returns using alternative investing?

According to Prequin’s 2022 Global Alternatives Report, the alternatives AUM concluded at $13 trillion in 2021 and is projected to expand to 11.7% ($23 trillion) by 2026. This is a look at what alternative investing is all about.

What Are Alternative Investments?

Alternative investments have no basis on traditional financial products like stocks, bonds, or cash. Most alternative investments don’t receive as much regulation from the SEC and could be more illiquid.

Types Of Alternative Investments

As more and more alternatives become available to retail or individual investors, it pays for investors to have a solid understanding of these options. The following are some examples of alternative investments:

1. Private Equity

Private equity is a term that describes investments in businesses not traded on a public market like the New York Stock Exchange or NASDAQ.

The goal of private equity firms is to generate returns for their investors by making strategic investments in private companies with the assumption that the value of those investments will increase by a certain time. You can further break private equity down into these categories:

  • Venture capital
  • Buyouts
  • Growth equity

These asset classes typically require long-term investments of substantial capital, so only institutions and wealthy individuals can participate.

2. Hedge Funds

A hedge fund is a type of pooled investment partnership that trades liquid assets using various investment strategies to generate a high rate of return for its investors. Entrepreneurs can invest in a wider variety of securities, as hedge funds are not subject to the same regulations as mutual funds.

Compared to other alternative investments, hedge funds are notable for their high liquidity ratio. Because they have a higher concentration of liquid securities, you can liquidate the funds in minutes. Due to the high costs and risks involved, only wealthy individuals and institutional investors, like pension funds, typically invest in hedge funds.

3. Structured Products

Structured products are a type of investment that involves pairing a debt instrument (such as a bond or CDs) with one or more derivative instruments tied to an underlying asset class or a collection of assets such as stocks, market indices, currencies, or interest rates.

Despite their complexity and potential for loss, structured products allow investors to create a uniquely tailored portfolio to their needs. Typically, investment banks produce them and offer them to institutional, corporate, and individual clients.

4. Private Debt

Private debt consists of loans from sources other than traditional banks. Businesses often use private debt for expansion, working capital increases, or real estate construction and development.

Given the historically low returns on government bonds, direct lending to businesses can provide a sizable premium over the cash flows accessible from liquid fixed-income products. Private debt funds, the firms that provide the funding, make money through two main channels: interest payments and the eventual repayment of the loan.

A private debt fund may also focus on senior, junior, or mezzanine debt, among other strategies, such as direct lending, venture debt, and exceptional situations.

5. Real Estate

Many Americans already have a stake in this asset class because they are homeowners, making real estate the most viable alternative investment. Real estate investments can take the form of direct property ownership or indirect investments.

Properties like apartment buildings and shopping centers provide regular rental income to their owners, and they hope for price increases over time.

Investors who want a more hands-off approach might buy shares of private real estate investment trusts (REITs) through a broker. REITs that trade publicly do so through the stock market.

In addition to its diversification benefits, real estate offers investors a hedge against inflation and favorable tax advantages.

6. Commodities

Commodities are tradable items that have both direct and indirect economic uses. Examples of commonly traded commodities include gold, farm animals, precious metals, wool, oil, gas, wood, and uranium.

Given their relative immunity to fluctuations in the public equity market, investors often use commodities as a hedge against inflation. Commodity prices fluctuate based on supply and demand market forces; increased demand will lead to higher prices and greater returns for investors. You can invest in commodities in several ways, including:

  • Futures Contract
  • Stock
  • Physical commodities

7. Collectibles

When you invest in collectibles, you aim to generate a return on your money through long-term appreciation of the items you own. Some of the common types of collectibles include:

  • Books
  • Rare wine
  • Stamps
  • Antiques
  • Trading coins
  • Art
  • Coins
  • Baseball cards
  • Toys

To succeed in this alternative investment strategy, you need an extensive understanding of the sector and the patience to hold on to your investment for a long time. It is not easy to predict how much a work of art, or a collection will increase in value because both can decline in worth or get destroyed.

Some collectors treat their collections as investments on par with their homes or cars, and their collections make up a significant portion of their net worth. Adding collectibles to a portfolio is a great way to diversify your investment base and spread your risk.

Final Word

Many investors are increasingly looking to alternative investments to diversify their portfolios, maximize their returns, and accomplish other financial objectives. That is why it is so important for investors to have a firm grasp of the options they have to adopt alternative investments into their portfolios successfully.

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Blogs Property Investors Real Estate

How Real Estate Investors Can Prepare For Turbulent Economic Future

Investing in the future is the smartest thing you can do now, considering the economy contracted for two consecutive quarters, the typical textbook definition of a recession. Although, the US is still not technically in a recession, as the National Bureau of Economic Research is the only body allowed to make that call (and they haven’t, yet…), the warning signs are there.

What can’t be ignored is that the economy is contracting while productivity is declining, so it’s best to prepare for the harsh economic days ahead. Because of the unpredictable economic behavior, this article will discuss how to invest in your future so you can ride through the hard times.

1. Create An Investment Plan

The first step to building a financially secure future is to create an investment plan. With such a volatile market, you need a guiding star to help you commit to the master plan and avoid panicked decisions. An investment plan lays down a strategy after gauging all the market variables. That way, you can recognize and weigh all the risks when investing, enabling you to fulfill all your obligations still. The plan should help you realize the best investment vehicles.

The key to creating a plan is to be realistic about what you can achieve. Note that creating an entire financial strategy for the future in one sitting isn’t going to work. Instead, break down each piece into smaller steps that are manageable and achievable. Once you’ve figured out the steps, write them down, so they’re easy to refer back to when needed.

2. Diversify Your Investments

As is often said, never place all your eggs in one basket. Diversifying is an excellent way to get the most out of your money, even in the most troubling economic slumps. It means spreading the investments across different asset classes so that if one class tanks, another will likely thrive. Markets you can try your hand at include:

A) Invest In REITs

Real estate investment trusts (REITs) are a great way to invest in real estate without owning any property. They’re publicly traded on stock exchanges and often pay out dividends from their rental income. In a risk-off environment such as the current one, REITs are typically the oasis of hope, and it’s easy to see why. REITs offer relative inflation protection and high dividends but bear a low correlation to the stock market and have low transaction fees.

REITs are excellent investment vehicles for the long term, typically outperforming bonds and stocks in some periods. If anything, REIT’s average yield is over 3%, more than double what you would earn from S&P 500 stocks. What’s more, REITs are liquid, so you can get your cash as soon as the market opens.

B) Home Flipping 

You don’t have to own an entire rental property to reap the benefits of investing in properties. A neat trick to try is home flipping, which involves buying distressed properties at discounts, renovating them, and selling them for a profit.

C) Sandwich Lease

In this arrangement, you enter a rent-to-own agreement with a landlord, then lease it to a tenant. It’s one of the most cost-effective ways to enter into real estate, as the tenant will allow you to purchase the property after several years.

3. Concentrate On Marketing

Investing in your marketing strategy is one of the best ways to create a sustainable business. Marketing will boost sales and build your reputation, increase your relevance and demand, and cements your place among customers, creating a loyal customer base.

One of the most potent forms of marketing is digital marketing. The main way of doing this is through search engine optimization (SEO) using keywords. You target a range of words potential clients use when searching for real estate properties for Google to drive traffic to your online sites.

Digital marketing could take many forms, such as email marketing, blogging—which 56% of marketers say is effective, and social media. Posting content on social media is exceptionally effective considering 82% of Americans use social platforms.

Whichever form of marketing you settle on, you should try videos. According to Wyzowl’s research, 86% of marketers said videos helped increase traffic and generate leads, while 81% said they directly helped increase sales.

4. Automate Your Savings

Automating savings is a great way to ensure you always have money available for whatever comes up. The best part is you won’t even have to think about it as it works in the background.

It’s also a great way to start investing in the future. You can set up automated transfers from checking to savings and then start saving with every dollar. It’s easy, painless, and will save you money in the long run.

To automate your savings, use an app like Acorns or Qapital. These apps allow you to set up automatic savings plans, plan, and invest without making withdrawals at specific times as traditional banks do.

5. Start Investing In Yourself

Another great way to prepare for the future is by investing in yourself. There are many ways to invest in yourself, such as:

  • Go to class: There are many courses available online or at local community colleges that can help you learn more about real estate and expand your knowledge in readiness for the future. Most of these courses have classes on various aspects of real estate, including how to market yourself, use social media, and manage your finances.
  • Subscribe to emails from industry leaders: By signing up for newsletters from real estate professionals or companies, you’ll stay up-to-date on changes in the industry and what you can do to adjust.
  • Listen to niche podcasts: Podcasts are another great way to learn about topics related to your industry—not just real estate. There’s a ton of valuable information on marketing, management skills, and more.

The Bottom Line – Invest In Your Future, No One Else Has More Of An Incentive

Just because the economy is tanking doesn’t mean you must sink with it. Since business is low, now is the best time to invest in the future and realign your business so you can reap big when the market turns hot again.

Some of the best tactics you can employ include concentrating on marketing, investing in your knowledge, diversifying your investment portfolio, and automating your savings. Before you set out, you must create an investment master plan to guide you through turbulent times.

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Real Estate Wealth Doesn’t Disappear; It Transfers

The economy is currently enduring a significant downturn, having recorded two consecutive quarters of a decline in the country’s GDP in July 2022 and also demonstrating a significant decline in productivity. The FED is purposely increasing the midterm interest rates to reduce historic inflation, it is not yet actually doing quantitative tightening per se, but is quelling economic by reducing consumer confidence. The FED is unlikely to recover until the 3rd or 4th quarter of 2023. For many, this is the textbook definition of a recession, and the signs are everywhere. There’s a bear market, consumer and small business confidence is in tatters, high inflation, and rising interest rates.

While the National Bureau of Economic Research refuses to call it a recession, many are feeling the heat, and the real estate industry is no exception. The Federal Reserve’s 20-year-high rate hikes have jacked up mortgage rates, putting the skid on a hot market. The last time consumer confidence in the housing market was this low (17%) was in 2011. The annual price appreciation rate dropped from 19.3% to 17.3%.

Two of the biggest real estate companies, Redfin and Compass, laid-off workers, with the Redfin CEO citing a 17% decline in expectations back in May 2022. Even REITs, traditionally investors’ safe haven, are taking a beating, with the S&P REIT index plunging 23% as of July 2022.

While the real estate industry may seem calamitous at the moment, it is often said that wealth, like energy, can’t be destroyed; it transfers. There’s a reason why real estate is touted as having produced 90% of the world’s millionaires. All you have to do is join the dots, follow the money trail, and you will be fine recession/downturn or not. Please keep reading to learn how to go about it.

How To Prepare For A Turbulent Real Estate Market

There is a lot of uncertainty in the markets, so real estate investors need to prepare for anything that comes their way. That means getting your house in order, including:

1. Reduce Debt

The average American is $90,460 deep in debt, but that doesn’t mean you have to sink to such depths. Huge debts will dent your credit score, diminish cash reserves you can use to improve your quality of life, eat into your emergency fund, and obliterate your ability to save or invest. Settle debts with higher interest rates and keep away from them. It would be best if you only kept debts with more prolonged and lower interest rate payments. Similarly, only sign up for debt whose investment will yield higher returns.

2. Diversify Your Investments

If you’ve just started investing in real estate, it is essential to diversify your investments because not all real estate forms perform the same. It means having a mix of hard assets in different industries that will help you weather any storm that may come your way. For instance, don’t just invest exclusively in commercial office blocks. Try malls, single-family units, multifamily units, REITs, or others.

3. If You Have The Money, Try A Hedge Fund

True, getting into and maintaining a hedge fund is costly, but it is one of the best vehicles during a downturn. Most hedge fund managers will employ different techniques such as derivatives, leveraging, and especially short selling, where you will make a profit if the value of an asset falls, which is perfect during an economic downturn.

4. Study About Returns

Since the market dictates that we watch the pennies, you have to assess the return promised by each deal before making a decision. For instance, you must be smarter in evaluating whether to pay off debt or invest. For example, instead of increasing payments towards offsetting the mortgage, you would be better off investing that money elsewhere, especially if the returns are much higher than the inflation rate.

5. Take Advantage Of Opportunities To Sell Your Home

Median home prices hit a record high of 440,300 in July 2022, the Fed continues to jack up interest rates, leading to higher mortgage rates, and the supply of homes is still lower than expected. Now might be the perfect time to sell your home if you wish to make the most out of the market. Since there’s little supply, there’s little competition, but you have to act fast before the spiraling mortgage rates lock out all potential buyers.

6. Think Long-Term Investment

It’s easy to get caught up in the excitement of a good investment opportunity, but it’s essential to keep things in perspective. You could lose money if you lose your head and make an impulsive decision. Instead, take time to consider all options before making any moves.

7. Curb Appeal

If you have a home that needs some work before it’s ready to sell, now is the time to get started. Although home repairs can be costly, they add value to the property.

HomeLight research suggests homes with good landscaping fetch between 5.5% and 12.7% more than poorly landscaped ones. There’s even an instance where a new $20,000 worth of curb appeal returned $200,000 more for a home they had bought a year earlier. It would help if you considered painting the walls in neutral colors, manicuring the lawn, and replacing old and broken stuff and appliances.

8. Build Relationships With Other Realtors

You don’t always have to compete, especially in a low-supply environment. Instead, team up with other realtors to create a network of peers for the common good. That should improve your craft, get referrals, and serve your customers better as you exchange valuable input from each other and find the best deals for your clients.

9. Make Use Of Technology

Instead of requiring clients to make a trip to view the property, you can provide virtual reality tours to help save some money. Additionally, you could use customer relationship management (CRM) platforms to keep track of listings and customers to ensure they get the best service.

There are plenty of real estate platforms and apps that make it easier to market listings to a broader audience. Some even utilize AI to match buyers to their most preferred listings, making it easier to find suitable homes.

Wrap Up

Whenever there’s an economic downturn, you should note that wealth doesn’t disappear; it just transfers. It may not be transferring to another visible entity, but may be transferring in time, or it may be transferring in nominal currency (for example, the US$ is increasing in value compared to the Euro, and although US$ denominated Real Estate prices are declining, they are increasing against the Euro). Your job is to follow the trail to ensure you maintain a profitable real estate business.

Some ways you can achieve this include diversifying your real estate portfolio, reducing debt, trying other forms of investments such as hedge funds, making use of technology, and opting for investments that provide the best returns.

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Real Estate

Section 8 Multifamily Ownership To Build Wealth

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The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program. And is one of the most reliable real estate investment opportunities known so far.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.

What Is The Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlords whose property is in the listing. The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills. A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

Section 8 Multifamily Home Ownership

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up top units and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units. Five units and above are multifamily but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on commercial property investment to build wealth over time.

Vouchers Under The Section 8 Housing Program

Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher. The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Advantages Of Section 8 Multifamily Home Ownership

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certainty Of Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability Of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.

Source: Morning Invest(Youtube Channel)

Building Wealth Through Section 8 Multifamily Home Ownership

Among several real estate investment opportunities one can look for investing in several multifamily homes as a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

A) Choose And Manage Tenants Wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

B) Ready Investors

The multifamily concept is more investor-friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

C) House ‘Hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

D) Add More Rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments. It gets better over time as you can hire property managers from top commercial real estate investment companies that also offer a few tax benefits like 1031 exchange process to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.

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If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at info@redpillkapital.com

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