What Are Alternative Investments?
Alternative investments are asset classes that are not available through typical investing channels. Venture capital, private equity, intellectual property and tangible assets are some examples of alternative investments. Many investors choose these assets because they allow them to diversify their portfolios. A broad portfolio can help reduce overall risk and enhance long-term income over time.
Alternative investments are often more complex than more common investment options, so it’s crucial to keep that in mind. Likewise, the Securities and Exchange Commission (SEC) has no jurisdiction over alternative investments. When contrasted to traditional assets such as stocks, this means they have a less defined legal structure. Alternative investments may require accredited or high-net-worth individuals in some circumstances, but they are becoming more accessible to all types of investors.
Types of Alternative Investments
Investors interested in working with alternative investments should learn about the various possibilities available. Some of the top alternative investments are as follows:
1. Alternative Real Estate Investments
Investors that purchase investment properties such as office buildings, residential apartments, or vacation homes perceive real estate to be an alternative asset. Rental revenue, wholesaling, and house flipping can all help you make money. If an investor does not want to be a landlord, they can invest in real estate investment trusts (REITs).
While these are the most frequent types of real estate investments, depending on the type of investor you are, there are a variety of other alternative real estate investments that may be a better fit. If you wish to invest in real estate, there are a few additional options:
- Real Estate Partnerships: When two or more investors pool their resources to achieve a common goal, they form real estate partnerships or joint ventures. Each partner often provides the other with an existing property, capital, experience, or anything else of value. When investors work together, they can disperse risk, distribute work, and improve prospective results more effectively than if they worked alone. One investor, for example, may be in charge of finances while the other brings substantial real estate knowledge. This is a type of alternative investment that pays a passive income to a capital-responsible investor.
- Impact Investments: Alternative real estate investments with high profits and positive social and environmental consequences are known as impact investments. You give funds for sustainable agriculture, renewable energy, or fundamental services like education and healthcare as an investor.
- Hard Money Loans: Hard money lending is another type of real estate investment that generates a steady stream of income. Obtaining a hard money loan is an alternative for investors who need to renovate a home. This is not a bank loan, but rather a loan from a private investor. Before making the loan, the hard money lender would estimate the “after repair value,” or ARV, to see if their investment will be successful. Because this is an asset-based loan, the property in question will be used as collateral. You can earn more passive income as a hard money lender than you do from bonds or dividend equities.
2. Private Equity
Rather than publicly traded stocks, private equity refers to capital invested directly in enterprises. This money can be used for expansion, marketing, and acquisitions by businesses. Long holding periods are required by many private equity firms, and share values are usually decided through discussions. To bypass the lengthy negotiation process, many investors prefer to engage with private equity companies rather than making direct investments. Private equity firms raise capital from investors and invest it in a variety of industries.
Distressed financing, leveraged buyouts, and “fund of funds” are three forms of private equity transactions that investors should be aware of. Distressed funding is the process of investing in a company that is underperforming in the hopes of increasing sales, hence increasing equity. Leveraged buyouts, on the other hand, are a type of private equity that entails buying an underperforming firm outright and selling it for a profit to another company. Finally, a “fund of funds” is a sort of private equity that invests in other asset classes like hedge funds or mutual funds.
3. Venture Capital
Financing fledgling firms and businesses is a type of alternative investment. The term “venture capital” refers to investment in private enterprises that are expected to grow rapidly. While venture capital and certain types of private equity may sound similar, it’s crucial to know the differences. Private equity involves financing more mature enterprises, whereas venture capital only refers to shares in newly founded enterprises.
The return potential of venture capital is well understood, as is the risk that comes with it. In three to seven years, investors who choose the appropriate company will experience huge profits. When predicting a company’s future performance, on the other hand, there is an inherent risk. Investors may have a say in corporate operations or have an active role in the company in some situations. Seed, early-stage, and expansion investments are all examples of venture capital.
4. Tangible Assets
Tangible assets are, as the name implies, physical investments. Real estate, gold, natural resources, and other items fall into this category. Tangible assets are in high demand because they may often avoid the negative consequences of market swings that other investment forms cannot. Real estate investors, for example, might benefit from built-in demand, but other investments, such as stocks, are more immediately affected by market fluctuations.
Because tangible assets are accessible to investors of all levels of experience, they are one of the finest alternative investments. While some investment kinds necessitate accreditation or large initial commitments, physical assets, such as real estate, are more accessible to novice investors. Many investors interested in real estate, for example, would be relieved to learn that there are a variety of financing options available to help them achieve their investing goals.
Alternative investments may be considered risky by some investors. Although all investments include some risk, alternative ways can assist you in managing risks throughout your whole portfolio. Before investing any significant sum of money, we always advise speaking with an investment advisor.
FAQ About Alternative Investments
What are examples of real estate alternative investments?
Some examples of real estate alternative investments are: office buildings, vacation homes, wholesaling homes and REITs.
Where can you go to find alternative investments?
Private equity firms such as MarketSpace Capital offer real estate alternative investment options.
Are alternative real estate investments a good idea?
It is always good to work with an experienced firm or advisor before selecting an investment opportunity. MarketSpace Capital can help.
MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.
Disclaimer: *For sold properties, actual sales price is reported. For active investments, the Estimated Current Value is based on the Managing Member’s estimate of current value. Recent acquisitions are generally valued at the acquisition price. Values may be internally prepared. This web-page/website is for informational purposes only and is qualified in its entirety by reference to the Confidential Private Placement Memorandum (as modified or supplemented from time to time, the “Memorandum”) of any offering of MarketSpace Capital.