As an investor, you can take advantage of non-traditional real estate investments to earn additional income. Here are the top alternative real estate investments that you can consider if you're looking to diversify your portfolio.

Key Takeaways

• Aside from investing in rental properties, commercial and residential properties, real estate investors can take advantage of alternative real estate investments to generate additional income.
• Alternative real estate investments refer to unconventional ways of investing in real estate beyond the traditional approach of buying and owning physical properties.
• Some of the best alternative real estate investments include: Real estate partnerships, impact investing, hard money loans, real estate crowdfunding and Real Estate Investment Trusts (REITs).
• Before you get into alternative real estate investing, consider speaking to a qualified financial advisor and real estate professional so they can offer you insights on the best investment opportunities to take advantage of.

Disclaimer

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.

What are Alternative Real Estate Investments?

Alternative real estate investments refer to unconventional ways of investing in real estate beyond the common approach of buying and owning physical properties.

These alternative investments can offer benefits such as diversification, potential for higher returns and reduced involvement in property management.

Types of Alternative Real Estate Investments

If you're a real estate investor looking to invest in real estate in a non-traditional way, here are some common alternative investment options to consider.

1. Real Estate Partnerships

Also known as a "joint venture", a real estate partnership is a business arrangement where two or more individuals or investors combine efforts and resources to jointly invest in and manage real estate properties or projects.

In such an arrangement, each partner will contribute resources such as an existing property, capital, skills or expertise in order to achieve the common investment goal among all partners. By getting into such a partnership, investors can pool their resources easily and share risks. This can enable them to invest in more significant and diverse real estate ventures, as compared to pursuing individual projects.

The terms and conditions of the partnership are typically outlined in a formal partnership agreement. This document governs the roles and responsibilities of each member as usually the sponsor will have more decision-making rights while the non-managing members will have less control but still get to enjoy the profits generated from the joint venture.

Benefits of investing in real estate partnerships

• Real estate partnerships allow investors to diversify their real estate investments by pooling resources from multiple individuals and investing in different real estate projects.
• Such partnerships provide access to a larger pool of capital, therefore giving investors access to more lucrative real estate opportunities.
• Since the different individuals who get into a joint partnership have different skill sets, they can combine their strengths and knowledge, thus improving the overall management and success of the real estate venture.
• By sharing risks among partners, individuals can reduce their exposure to potential losses in real estate investments.
• Partnerships can provide access to off-market deals or opportunities that may not be available to individual investors.

2. Impact Investing

Impact investing is an investment approach that aims to generate positive and measurable social and environmental impact alongside financial returns. Unlike traditional investing, where the primary focus is solely on financial profitability, impact investing aims to address important social and environmental issues and create meaningful change.

Currently within the impact investment industry, real estate investments make up approximately 10% to 15% of all impact investments. Within the real estate industry, impact investment focuses on these areas:

Affordable housing:The main focus of these investments is to provide safe, decent and affordable housing options for low and moderate-income individuals and families.

Sustainable community: The goal here is to focus on creating environmentally and socially responsible urban developments that enhance the growth of the community.

Green real estate: Green real estate projects are set up with the aim of focusing on environmentally sustainable and energy efficient properties and developments.

For those looking to get into real estate impact investing, first start by deciding on the kind of impact investing that you want to be involved in and then find an investment fund that aligns with your goals and values. Ensure that you do thorough research on the funds and consider speaking to a qualified financial advisor and real estate professional so they can offer you guidance on the best funds to invest in.

Benefits of impact investing in real estate

• Impact investing in real estate allows investors to align their financial goals with their values. By funding projects that promote sustainable development, affordable housing and energy efficiency, investors contribute to making a meaningful difference in the world, beyond financial returns.
• By investing in impact-focused real estate assets alongside traditional investments, investors can diversify their investment portfolios as well as reduce overall risk.
• Sustainable real estate projects often incorporate features that enhance the long-term value of the properties. Energy-efficient buildings, eco-friendly designs and thoughtful community development can lead to reduced operational costs and higher resale values over time.
• Many tenants, especially millennials and Gen Z's tend to prefer living and working in green and sustainable buildings. These properties not only help them to save costs on things like electricity and water, but also align with their lifestyles of being more environmentally conscious.
• In some regions, governments provide incentives, tax credits or grants for investments that align with specific social and environmental goals. Impact investors in real estate may benefit from such financial incentives, enhancing the overall return on investment.

3. Hard Money Loans

For investors looking to renovate a property without borrowing from banks and traditional financial institutions, hard money loans are a good option to consider.

A hard money loan, also known as a "bridge loan", is a short-term, asset-based loan that is issued by private investors or companies to real estate investors who are looking to renovate a property. Hard money lenders usually focus on the “after repair value” (ARV) of the property being used as collateral rather than the borrower's creditworthiness. This makes them a good option for borrowers who may not qualify for traditional loans.

Benefits of investing in hard money loans

• Hard money loans have a faster approval and funding process compared to traditional bank loans. As such, investors are able to quickly jump on time-sensitive real estate opportunities like purchasing a property at an auction.
• Lenders of hard money loans primarily focus on the value of the property being used as collateral, rather than the borrower's credit score or financial history. Therefore, this makes hard money loans accessible to investors who may not qualify for conventional financing due to credit issues.
• Acquiring such a loan involves fewer bureaucratic processes and paperwork compared to traditional bank loans. This reduces the time and effort required for loan approval.
• Hard money loans can be useful for financing unique or unconventional properties that may not meet the criteria of traditional lenders. These may include distressed properties or those in need of significant renovations, as well as commercial properties with unique revenue streams.
• Since hard money lenders focus more on the property's value and less on the borrower's credit worthiness, individuals who are self-employed or those with irregular income streams can also invest in real estate using this strategy.

4. Real Estate Crowdfunding

For tech savvy investors, real estate crowdfunding can be a good alternative investment as you can access crowdfunding platforms online through the internet.

Real estate crowdfunding is a method of real estate investing that allows multiple individuals to pool their resources together to invest in specific real estate projects or properties. Through crowdfunding platforms, investors can be connected with real estate developers or sponsors seeking capital for their projects. Each investor will contribute a certain amount of money and then collectively finance a project. With this type of investing, the individual investors share potential risks and returns.

Crowdfunding has made it possible for more people to invest in real estate today. However, it is important to conduct due diligence before investing in any crowdfunding platform.

Benefits of investing in real estate crowdfunding

• Real estate crowdfunding allows investors to diversify their portfolios by participating in multiple real estate projects across different locations and property types. This helps in reducing the overall investment risk.
• Crowdfunding provides access to the real estate market with lower investment thresholds, allowing individuals to invest in properties they may not afford on their own.
• These platforms usually offer investors detailed information about the investment opportunities, enabling investors to make informed decisions based on project details, financials and the track record of the developers.
• Some crowdfunding platforms focus on socially responsible and sustainable projects, allowing investors to align their investments with their values and contribute to positive social and environmental outcomes.
• Crowdfunding platforms often charge lower fees compared to traditional real estate investments, potentially enhancing overall returns.

5. Real Estate Investment Trusts (REITs)

REITs are companies that own, operate or finance income-generating real estate. These properties can include commercial buildings, residential apartments and healthcare facilities. To invest in REITs, investors can buy shares of publicly traded stocks on major stock exchanges. REITs are an attractive investment choice as they are required to distribute 90% of their earnings as dividends to shareholders.

Key features and characteristics of REITs include:

• REITs are structured as corporations or trusts that own and manage real estate properties. They must follow specific regulations and tax rules to qualify as REITs.
• They derive a significant portion of their revenue from the rental income earned on the properties they own. By law, REITs must distribute at least 90% of their taxable income as dividends to shareholders, making them attractive to income-seeking investors.
• Many REITs are publicly traded on major stock exchanges, allowing investors to buy and sell shares like regular stocks. This provides liquidity and easy access to real estate investments without the need to purchase physical properties.
• REITs are managed by experienced real estate professionals who handle property operations, maintenance and the financial aspects.
• They offer a lower entry barrier compared to direct real estate ownership, making them accessible to individual investors with smaller amounts of capital.

The two common types of REITs are:

Equity REITs: These REITs invest primarily in real estate properties and generate income from renting or leasing them.

Mortgage REITs: Mortgage REITs invest in real estate mortgages or mortgage-backed securities and generate income from interest earned on these investments.

Benefits of investing in REITs

• REITs provide investors with a way to diversify their portfolios by owning a variety of real estate properties across different sectors and geographic locations. This diversification helps to reduce the risks associated with investment.
• Investing in REITs allows individuals to participate in the real estate market without the need to directly own and manage physical properties. REITs handle property management, maintenance and operations on behalf of investors.
• REITs are required by law to distribute a significant portion of their taxable income as dividends to shareholders. This feature makes REITs an attractive investment option for income-seeking investors, as they offer regular income from rental earnings.
• Most REITs are publicly traded on major stock exchanges, providing investors with easy liquidity. They can buy and sell REIT shares like regular stocks, allowing for quick access to capital when needed.
• REITs are managed by experienced real estate professionals who have expertise in property selection as well as financial management. This professional management can lead to more efficient and profitable real estate investments.

6. Private Notes

A private note refers to a document that is often used to confirm that a payment for goods or services has been completed or for the settlement of a debt. Private notes usually detail the amount that the lender has agreed to give the borrower, the interest rate as well as the loan repayment period.

In real estate, investors become the lenders and receive interest payments from the borrowers. As an investor, often times you might end up lending money to an individual or small group. That said, ensure that you do your background checks first because, if the borrower defaults on the repayment and you have no collateral, you might end up making serious losses. To manage this, you can choose to join groups where you can network with real estate professionals or limit your lending to only close friends and family members.

Benefits of private notes

• Investing in private notes can provide a consistent stream of income through regular interest payments made by the borrower. Investors can enjoy passive cash flow without the responsibilities of property ownership.
• Private notes are often secured by the property itself, serving as collateral. If the borrower defaults, the investor may have a claim to the property, reducing the risk compared to unsecured investments.
• Private notes can be extended to borrowers who may not meet the strict criteria of traditional lenders, making it possible for them to take advantage of great investment opportunities.
• Typically, private notes come with fixed interest rates and predictable returns. This stability can be attractive to investors seeking reliable income without the volatility of other investments.
• Unlike direct property ownership, investing in private notes saves you the trouble of property maintenance, tenant management and other landlord duties.

7. Real estate syndication

Real estate syndication is a strategy in which multiple investors pool their financial resources and expertise to invest in a real estate project collectively. Similar to a real estate partnership, the sponsors or general partners lead the project and manage the investment. Syndicates were established by the 2012 JOBS act to enable companies raise capital through crowdfunding.

The investment structure of real estate syndications is typically organized as a limited partnership (LP) or a limited liability company (LLC). Usually the general partners take the active role in identifying and acquiring the real estate property and managing the day-to-day operations of the project. The limited partners on the other hand, contribute capital to the syndication and have a more passive role in the investment. They provide the funding but are not directly involved in the management and decision-making processes.

Benefits of investing in a real estate syndication

• Real estate syndications provide individual investors with access to larger and potentially more profitable real estate projects that they may not be able to participate in on their own. Syndications pool the resources of multiple investors, allowing them to collectively invest in larger properties or development projects.
• By participating in a real estate syndication, investors can achieve diversification by having exposure to different types of properties and markets. This diversification can help spread investment risk and reduce the impact of any single property's performance on the overall investment portfolio.
• Real estate syndications are often led by experienced real estate professionals who have expertise in property acquisition and overall management. Passive investors can benefit from the syndicators' knowledge and skills without having to actively manage the investment themselves.
• For passive investors, real estate syndications offer a way to invest in real estate without the need for direct involvement in property management or day-to-day operations. The syndicators are the ones to handle all aspects of the investments.
• Like other real estate investments, real estate syndications can offer certain tax advantages, such as depreciation deductions and the ability to defer capital gains taxes through 1031 exchanges, depending on the structure and nature of the investment.

8. Undeveloped land

Investing in raw land that is undeveloped might seem like a strange alternative real estate investment option but it has its own benefits. For example, you will incur very low maintenance costs as all you'll have to do is maybe till or mow the land every so often.

Investing in undeveloped land involves purchasing raw, vacant land with no existing structures or improvements. As an investor, you can earn money from undeveloped land if you choose to sell it to interested developers. Alternatively, you can wait for its value to appreciate over time.

Benefits of investing in undeveloped land

• Compared to developed properties, undeveloped land is often more affordable, making it accessible to a broader range of investors.
• Over time, undeveloped land may appreciate in value due to factors such as population growth and increased demand for land.
• Holding costs for undeveloped land, such as property taxes and maintenance, are typically lower than those associated with developed properties.
• Very minimal maintenance is required since there are no structures on the land, thus no need for repairs or renovations.
• Investors have the option to develop the land themselves or partner with developers to create residential or commercial projects, which can lead to higher potential returns.

9. Manufactured homes

Manufactured homes, as the name suggests, are homes that are built in a factory and then transported to a designated site, where they are assembled and placed on a foundation.

These homes can either sit on land that is owned by a private owner or in a trailer park. If for example as an investor you choose to have them sit in a trailer park, you will be required to pay a monthly rental fee to cover things like water, sewer connection and trash collection. If you own private land, you can place the manufactured homes there. You can make money from these homes by leasing them out as rental property to tenants who can sign long-term leases.

Benefits of Investing in manufactured homes

• Manufactured homes are generally more affordable than traditional homes, making them accessible to a broader range of investors.
• Manufactured homes are constructed in a factory, allowing for quicker build times compared to traditional homes. This can lead to faster occupancy and potentially quicker rental income generation.
• Investing in manufactured homes can contribute to addressing the need for affordable housing, making it a socially impactful investment choice.
• The construction materials used in manufactured homes often require less maintenance, resulting in lower ongoing repair and upkeep expenses.
• Manufactured homes cater to a diverse market, including renters seeking affordable housing, retirees looking for downsizing options, and seasonal residents in vacation areas.

10. Investing in yourself

Investing in real estate doesn't have to mean buying property or shares in a REIT, for example. You can also choose to invest in yourself by acquiring new skills or obtaining licenses or certifications that can enhance your real estate investment journey. For instance, many real estate investors opt to obtain a real estate license, not necessarily to work as real estate agents, but to leverage the following benefits:

Access to MLS: Having access to the multiple listing service (MLS) allows you to discover potential deals independently, without relying on agents, colleagues or acquaintances.

**Networking opportunities: **Obtaining a real estate license offers a convenient way to expand your professional network, which can help you find and close great real estate deals.

Additional income: As a licensed agent, you can earn commissions on your real estate transactions, potentially earning significant income based on the number of deals you handle each year.

Increased control: Representing yourself in transactions grants you greater control over negotiation processes, enabling you to make informed decisions and secure the best possible deals.

Education and resources: Pursuing a real estate license will provide you with a head start in understanding the industry and familiarizing yourself with relevant terminologies.

The specific requirements and expenses associated with obtaining a real estate license vary by state since there is no federal real estate license. Typically, the process may take three to six months, and the costs could amount to approximately $1,000 covering pre-licensing courses and examination fees.

Conclusion

Traditional real estate investing may not be accessible to everyone, and so if you're interested in getting into real estate investing using other avenues, then you should consider looking into alternative real estate investments.

From real estate crowdfunding and private equity funds to REITs and real estate notes, these alternative investments allow investors to tailor their portfolios to align with their specific financial goals. Before you get into any kind of investment, consult a qualified financial advisor and real estate professional so they can help you carefully assess the available opportunities, and if they align with your investment objectives.

Diversifying into alternative real estate investments can complement traditional strategies and ensure that your investment portfolio is well balanced for achievement of long term success.

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Sources

https://www.investopedia.com/alternative-real-estate-investments-4846388

https://www.fortunebuilders.com/alternative-real-estate-investments/

https://finance.yahoo.com/news/8-alternative-real-estate-investment-180008690.html

https://www.bankoncube.com/post/top-5-best-alternatives-to-real-estate-investments