When you first think about real estate investing, some mainstream options come to mind. Rental properties and real estate investment trusts (REITs) are the most common examples. These are certainly good ways to make a profitable real estate investment. But are they the best for your individual portfolio?
Depending on your financial situation, they might not be. Here, we’ll discuss 10 alternative real estate investments that are off the beaten path:
Real Estate Partnerships
Hard Money Loans
Real Estate Crowdfunding
Real Estate Syndication
Mobile Home Parks
Investing In Yourself
Let’s take a closer look at each one, and find out how they work!
1. Real Estate Partnerships
A real estate partnership – sometimes called a “joint venture” – is an arrangement where two or more people pool their resources to make money on investments. In most partnerships, one of the investors will contribute more money than the others. This individual is known as the “sponsor.” The sponsor typically has final say over all investment decisions, and takes an active role in day-to-day operations.
Some individuals can join a partnership with non-cash assets. For example, they may have particular expertise, or they may work full time for the partnership acquiring and selling properties. They may even invest by contributing a property directly to the partnership. Most people, however, will simply invest cash. These people are known as “limited partners,” and normally have little to no say over managing the partnership. However, they benefit from a passive stream of income – provided the partnership is profitable.
This doesn’t mean there’s no effort involved. You still have to do your due diligence and make sure the partnership is a sound investment. But once your money is invested, you can kick back and enjoy the cash flow.
A real estate partnership can be structured in several ways. A small partnership can be as simple as a contract signed between two friends. More complex arrangements include limited liability companies (LLCs), limited liability partnerships (LLPs), and joint ventures. Some partnerships can even raise money via crowdfunding, with each contributor obtaining a proportionate share of the partnership. There will be different classes of investors in most cases, with different rights and payouts depending on their initial investment.
Before you join a real estate partnership, do your research, and compare several different options. Look at their respective track records and the kinds of properties they invest in. Or, you can start a partnership of your own by pooling your resources with a friend or business partner. In that case, make sure to hire an attorney so you know the paperwork is being handled properly.
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2. Impact Investing
An impact investment has a dual goal. The first is to make money. The second is to improve some other aspect of the investment – typically by reducing its environmental impact or improving its social impact. Impact investments aren’t just limited to real estate. Investments in education, healthcare, renewable energy, sustainable agriculture, and many other sectors are all different forms of impact investment.
Real estate investments currently make up around 10% to 15% of all impact investments. For real estate in particular, an impact investment could take the following forms:
Affordable housing – These investments are designed to provide housing to lower-income individuals.
Sustainable community – A sustainable community project is designed with an eye towards future growth in the area.
Green real estate – Green real estate projects are built to higher environmental standards than required by law. The goal is to improve energy efficiency, and reduce waste and emissions.
If you want to invest in an impact fund, decide on what kind of impact you want to make. Then, find a fund that aligns with your values. For example, if you feel strongly about affordable housing, look for an affordable housing impact fund. You can find these funds in many ways, whether through your own personal network or through a simple internet search.
Verbhouse is one good example of an impact fund. They provide rent-to-own properties with a lease-purchase option, and they focus on high-cost areas like New York, Los Angeles, and San Francisco. Their goal is to ensure that essential workers are able to afford to live in these areas, where they would normally be priced out of the market. Many of their investors are educational institutions, whose employees don’t earn anywhere near enough to afford homes in certain cities.
3. Hard Money Loans
A hard money loan, sometimes called a “bridge loan,” is a loan taken by a property owner for the purpose of improving the property. These are short-term loans, issued by investors and funds, rather than by traditional lenders. The property itself is used as collateral, so the loan is safer than one based solely on credit. In most cases, the lender will evaluate the property based on the after repair value (ARV), which is the anticipated value of the property following any improvements.
Bridge loans can be advantageous for borrowers and lenders alike. For the borrower, it’s a way to secure financing for property improvements, which can ultimately lead to more profits. For the lender, it means earning a better return than you would on a bond or similar investment. There’s no middleman, so the lender is collecting 100% of any interest on the loan.
That said, making a hard money loan is more complicated than writing a simple contract. For one thing, it’s vital to obtain title insurance, in case there are issues with the lien or title. You’ll also need to do your due diligence on the buyer, and ensure their creditworthiness. And as with any time you’re drawing up a contract, it’s wise to hire an attorney.
Here’s a quick overview of the process:
Determine how much money you’re willing and able to lend out.
Network with people in the industry. These kinds of loan opportunities are rarely advertised, and most investors will find clients by word of mouth.
Do your due diligence. Pay to run a background check on the borrower, and obtain their credit report.
Negotiate the terms. Sit down with the borrower and figure out the interest, repayment term, and how the closing costs are to be paid.
Meet with an attorney, and have them draw up a contract for the agreed-upon terms.
Keep records of the contract, payments, and any other relevant paperwork. You never know when you might need it.
4. Private Notes
A note is a legal document that serves as a record that a loan has been made. For example, you’ll sign a mortgage note when you close on your home. But notes don’t have to come from a bank or other institution. In some cases, a loan is made from one individual to another. This kind of note is called a private note.
A private note will include all of the same things as a traditional note. There’s an agreed-upon amount of money, an interest rate, and a defined payment schedule. The lender receives a consistent rate of return, and the borrower gets funding to improve their properties or purchase new ones.
That said, private notes also come with some risks. You’re often lending to an individual or a small partnership. If the borrower goes into default, you may not have any collateral. You’ll have to go to court and convince the judge to issue a judgement in your favor. Even then, if the borrower is financially insolvent and declares bankruptcy, you may never see a single penny.
For this reason, you need to make sure you trust the people you’re lending to. In most cases, this means lending money to a friend or business partner who has a history of successful real estate investments. That way, you can be reasonably certain that you’ll get your money back.
Of course, this can be difficult if you don’t personally know any real estate investors. In that case, join a local networking group of real estate professionals. Go to several meetings, and listen carefully to what you hear. Soon, you’ll get an idea of which local investors are worth lending money to, and which are represent an unacceptable risk.
Another option is to go through an online marketplace. This can be more risky, since you’re going off of public financial records and credit reports. If you’re going to go this route, be very careful about who you lend money to.
5. Real Estate Crowdfunding
Crowdfunding is a newer method of investing, and it’s done through the internet. If you’re a tech-savvy person, you’re probably familiar with sites like Kickstarter, where entrepreneurs can develop products with funding from everyday people. Real estate crowdfunding is similar, but instead of selling a product, business owners are looking for investments.
Different crowdfunding campaigns can use different methods. A larger developer, for example, will often use crowdfunding to obtain substantial sums of money from accredited investors. Smaller businesses may cast a wider net, looking for investments from anybody with cash. This is great news for everyday folks who don’t have enough wealth to become accredited investors.
In addition to launching their campaign on crowdfunding platforms, borrowers will often use other social media like Twitter and Facebook to advertise the campaign. This wasn’t always possible. Prior to 2012, advertising for real estate crowdfunding was strictly limited. But that year, Congress passed the JOBS act, which loosened restrictions on this kind of advertising. This has enabled potential borrowers to reach a broader audience, and spurred major growth in real estate crowdfunding.
6. Real Estate Syndication
A real estate syndicate is similar in many ways to a real estate partnership. Multiple investors will pool their resources, and purchase properties that they couldn’t afford on their own. They can be structured as an LLC or limited partnership, and they’re geared towards small- to mid-sized investors. Syndicates were established by the 2012 JOBS act, in response to criticism of standard partnerships, which often restrict investments to larger, accredited investors. Even the smallest retail investors can dip their toe in the real estate market with a syndicate.
If you’re investing in a real estate syndicate, the process is straightforward. Find a syndicate with a solid track record, and invest as much as you like. If you’re trying to start one, you have more options. If you want, you can become a syndicator, not just a regular investor.
A syndicator is someone who’s responsible for actively managing the properties. For example, if the syndicate is purchasing rental properties, the syndicator will be responsible for property management. If the syndicate is flipping houses, the syndicator will be responsible for hiring contractors, scheduling inspections, and following up on all work. In larger syndicates, there may be more than one syndicator.
Syndicators receive a larger share of the syndicate’s returns than ordinary investors. Then again, it can be a full time job, whereas investors are earning a passive income.
7. Raw Land
Investing in raw, undeveloped land might seem like an odd choice, but it has a few unique benefits. For one thing, there’s little to no maintenance. In some areas, you might have to have the lot mowed from time to time. But other than that, you don’t have to do anything. There are no flooded toilets, broken-down furnaces, or any of the other headaches property owners are accustomed to deal with. For another thing, there’s often less competition. Owners will often accept a lowball offer, simply due to a lack of interest.
There are a few ways to earn money from raw land. The first and most obvious is to leave it as it is and wait for it to appreciate. Depending on the property tax rate, you can earn a nifty profit for virtually no effort. Another method is to improve the land in some way. For example, if your land is zoned residential, you could level the ground, install sewer lines, and sell it to a developer as buildable land. Or, you could develop the land yourself. This is costlier than the other options, but it also means you earn a larger profit.
A word of warning: Before you buy, make sure the land is zoned appropriately for what you intend to do with it. Having a property re-zoned isn’t easy, and there’s no guarantee that you’ll be successful.
8. Manufactured Homes
The terms “manufactured home” and “mobile home” are often used interchangeably. This isn’t technically accurate. Mobile homes were constructed prior to June, 1976, and were only very loosely regulated.
Since that time, the Department of Housing and Urban Development has imposed more stringent building requirements, and these types of houses have been referred to as “manufactured homes.”
Whatever you call them, many investors overlook manufactured homes because they’re not a flashy investment. This leaves the market wide open for people who care about profits more than they care about making a big splash.
Manufactured homes can sit on a privately-owned lot or in a mobile home park (“trailer park”). When they’re located in a park, the owner pays a monthly lot rental fee. This fee often includes water and sewer hookups, as well as trash collection. Either way, you can invest in the home. If it’s on a private lot, you can also purchase the land.
Mobile homes are rarely suitable for major renovations that would improve their value. Instead, the most common investment strategy is purchasing them and using them as rental properties. Sign a tenant to a long-term lease, and you’ll have a reliable stream of income.
9. Mobile Home Parks
If you’ve got the money, why limit yourself to a single mobile home? Instead, you can buy an entire mobile home park. Now, we’re not talking about buying all the homes in the park – that would be impractical, and many people wouldn’t want to sell. We’re talking about buying the actual park business, along with the land it sits on. At that point, you charge a monthly lot fee to each tenant, and file for eviction if the fee is unpaid.
There are a couple of major advantages to mobile home park investments. To begin with, because you don’t own the homes themselves, you’re not responsible for their maintenance. You’ll need to take care of groundskeeping, maintain the water and sewer systems, and arrange for trash collection. Because you don’t have a lot of expenses, you can earn significant profits. Not only that, but mobile homes are expensive to move from park to park. For this reason, mobile home owners tend to remain in place for many years, so parks experience relatively low turnover.
As an added bonus, many mobile home parks offer additional amenities – for a fee. For example, you might operate an on-site laundromat, convenience store, or other services. If you’re clever, you can earn additional income through these channels.
10. Investing In Yourself
Not every real estate investment needs to be a direct investment into a property. By investing in licenses, certifications, and new skills, you can improve your income in the long run. A good example of this is obtaining a real estate license. You don’t need one to become an investor, but it can give you access to resources that most people don’t have. These include:
Education – Most people haven’t been thoroughly educated on the ins and outs of real estate transactions. Through the licensing process, you’ll get a unique insight into the industry.
Networking – Many of the investment methods we’ve discussed require you to have a strong network. Obtaining a license is a great way to establish yourself in your local real estate community.
MLS access – The multiple listing service (MLS) is a database of real estate listings that’s only accessible to licensed professionals. Without a license, you’ll have to pay someone with access to bring you listings.
More control – If you’re buying and selling properties, you can represent yourself. This gives you more control over the terms of the deal.
More money – Real estate agents earn a commission on every transaction. When you represent yourself, you can pocket that fee, rather than paying it to a third party.
Real estate licensing requirements vary from state to state. Depending on where you live, you’ll spend around three to six months studying and preparing for your exam. Many states require you to take a pre-licensing course, which can cost as much as $1,000. You’ll also need to pay a fee to sit for the licensing exam.
The world of real estate investment is far more varied than only rental properties and REITs. All 10 of these alternative real estate investments are equally-valid ways to earn money. Best of all, many of them allow you to earn a passive income, which is the holy grail of any kind of investment.
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