Jean Folger has 15+ years of experience as a financial writer covering real estate, investing, active trading, the economy, and retirement planning. She is the co-founder of PowerZone Trading, a company that has provided programming, consulting, and strategy development services to active traders and investors since 2004.
Updated August 25, 2021 Reviewed by Reviewed by JeFreda R. BrownDr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.
Part of the Series Real Estate Investing GuideReal Estate Investing Basics
Investing in Rental Property
Alternative Real Estate Investments
Pros & Cons of Real Estate Investing
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.
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.
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.
Real estate partnerships can provide a welcome source of passive income for investors.
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 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:
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.
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.”
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.
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:
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.
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:
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.
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.