20% Returns? 3 Alternative Investments You Never Knew Existed
Most people think of investment only in traditional platforms such as stocks, bonds, and cash.
However, there are other investment platforms you should know about because they offer great returns.
In this article, I will present 3 different investment ideas that you probably haven’t heard of, and whether it is worth adding to your own portfolio.
But first:
What Is An Alternative Investment?
Alternative investments refer to a class of assets different from stocks, bonds, or liquid cash.
You can't easily sell them or convert them to cash, which makes them illiquid.
However, most alternative investments or assets are relatively easy to access for retail investors and institutional investors alike, which has made them increasingly popular for investors due to its potentially high returns.
Moreover, these types of investments have slightly different structures and accessibility, and they share identical characteristics to enable you to easily identify them:
Alternative investments are not under the US SEC regulation.
They are not liquid assets, so you can't easily sell or convert them to cash as mentioned previously.
And they usually are not correlated to conventional asset classes in the market.
So now that you have a general idea of what alternative investments are, let us take a look at 3 of the most popular ones that can potentially offer returns up to 20%.
Alternative Investment #1
First up, peer-to-peer lending.
Peer-to-peer lending works similarly to a marketplace. It is a platform that brings people together that want to lend money to those that need a loan.
The platform provides a way to borrow money without using conventional financial institutes like banks.
Some P2P platforms automatically divide the money you lend among many borrowers, but others allow you to choose the person to lend money to the platform.
The interest rates on P2P platforms are higher than on traditional savings accounts, which can range from 7 to 15 percent per annum for the lenders. And 10 to 30 percent for the borrowers.
If you are interested in becoming a lender in a P2P lending platform, you must check that your local authorities regulate it.
Also, be sure to understand the risks involved, such as the risk of default because the borrower might not pay you back.
Besides, there is also the risk of early or late payment – if the loan is repaid later than the due date, it could affect your bottom line profit.
But if the loan is repaid early, you can lend out the money again to make more profit. However, the interest rate may not be the same.
Finally, there is the risk of the P2P platform going out of business.
This is actually quite common, and many have lost huge amounts of money because of this, which is why it’s important to thoroughly research the platform before committing your money.
I will give you some platforms that have a good history in a bit, but more on that later.
All in all, being an investor in a P2P platform is viable because you can control the interest rate you lend to others.
Although it comes with certain risks like the winding up of the P2P company, this can be largely mitigated provided you do your homework beforehand and spread your eggs across multiple baskets.
As for the P2P platforms that I recommend, keep in mind that these are not sponsors, I am just recommending them based on my experience.
The first one is Upstart, this is the leading AI lending marketplace in the US for people to secure credit, whether it be a personal loan, credit card or debt consolidation, home improvement loans, medical loans, wedding loans, or moving loans, they’ve got you covered!
Upstart began in 2012 - the platform considers a borrower's academic performance, work history, and potential earnings before approving their loans.
Another example of a P2P platform is Prospers; it began in 2005, and provides a wide range of loans including debt consolidation and medical loans.
Alternative Investment #2
Number 2 is fractional real estate.
Fractional real estate investing describes when several different investors split the cost of a property among them.
Sometimes, each investor is called a shareholder, depending on the type of legal agreement between the investors. This is similar to the concept used for sports cars, private jets, and other expensive items.
Partial property ownership gives you a stake and makes you a part-owner.
Fractional real estate investments differ depending on the group of investors or organizations involved.
The investment model allows you to get a deed and equity in the property, but you can also buy shares in the property.
Some investment models allow you to stay on the property for vacation and host meetings. You can take over the property and manage it yourself, or rent it out, probably on Airbnb.
Fractional real estate investment has many benefits for an investor, including a lower barrier to entry, which allows you to split the cost among a few investors rather than coming up with a substantial down payment yourself.
Also, it is an excellent way to earn passive income, which will help you build your overall earnings.
Let’s say you and your partner agree to the terms; you can set up the property as a fractional rental, hire a professional management company, and earn a significant return on investment.
In addition, it provides a lower investment burden.
So, you can start your fractional real investment with little cash; it could be $5 or $100, depending on the company. Therefore, you can earn a passive income with a low salary.
The primary drawback of the investment model is finding the right group to work with.
Also, mortgages are designed for two at most, so financing a home with many investors could present complications.
So, it’s best to acquire the property with cash. This investment model is best for those looking to break into real estate.
If you want to commence your path to real estate investment, fractional real estate investing is a good place to start—also, buyers looking for a non-primary property, those that don't want to live in the home.
Here’s an example of fractional real estate: let's say Ken lives in Dallas, Texas, and wants to purchase a home in Los Angeles for vacation.
His budget is $120,000.
If the house he likes costs $480,000, he needs the help of one or more people to complete the payment since his money is a quarter of the cost.
If he finds people that help him complete the payment, the home will have more than one owner.
Each owner will own a percentage of the property share depending on the amount they paid to buy it.
Alternative Investment #3
Number 3, asset leasing.
The investment model allows you to co-invest in assets such as bikes, cars, furniture, and electronics leased to companies with a good reputation and remarkable economic growth.
Asset leasing agreement terms are pre-agreed, which leads to monthly repayments.
Although, it’s hard to think a person could earn money from assets that are slowly appreciating.
However, the model is becoming more popular.
Investors earn from the model because different companies payout rent at regular intervals.
An investor can combine the assets to form a portfolio. Therefore, you can purchase assets and lease them to a business. The business will pay for using the asset at constant intervals.
However, assets can be bought by a consortium. A consortium has more purchasing power and deals with organizations that can lease the assets.
Investors can invest in such lead agreements separately or pull their resources and earn income regularly, monthly, quarterly, or every six months.
It depends on the terms of the lease agreement. Typically, these assets yield modest returns (15% -20%).
Asset leasing provides a consistent source of passive income. Many people invest in mutual funds and stocks; however, these investment options are occasionally volatile.
Alternatively, leasing assets to companies presents minimal risk since these organizations have strong balance sheets, and the physical assets can serve as collateral.
The alternative investment model suits people who want to generate a fixed monthly or quarterly passive income stream. Also, those who want to diversify their investment are comfortable with long-term investment.
The disadvantage of the asset leasing investment option is payment default. Sometimes companies default on their repayment agreement for many reasons, which could affect your earnings.
Also, it may not be easy to find a company that would lease the physical assets, which can cause the asset to depreciate.
Why Do You Need To Invest In Alternative Investments?
Lesser volatility
Alternative investments don’t rely on broad market trends like stocks.
Instead, they rely more on the strength of each particular investment.
So, alternatives can lessen the overall risk of your portfolio.
High returns
Alternative investment can enhance the risk and return of your investment portfolio.
It improves the overall return on investment through access to a larger galaxy of investments and strategies.
Broader diversification
Without correlation to conventional asset groups, alternative investments can benefit you by providing a chance to diversify your portfolio.
Direct ownership
In many public investments, you only purchase a paper asset.
You don't own anything directly.
Even if you invest in real estate, you are many levels removed from having your name on the deed of the property.
For example, if you purchase wine or art (collectable investments), you own both the bottle of wine or the painting.
If you bought a property or a stock, you don't directly own the property or the company.
Direct tax benefits
Alternative investments can provide impressive tax advantages.
Investing in alternative investments allows you to keep more of your profit because of the structure.
The two most crucial tax benefits are pass-through depreciation and long-term capital gains treatment.
Several real estate funds or syndications deduct depreciation expenses from net income, which reduces taxable income.
Disadvantages Of Alternative Investments
Investors accreditation
Most alternative investments want accredited investors, i.e. rich investors capable of spending huge sums of money.
Nonetheless, changes to regulations continue to create new ways for non-accredited investors.
Long lockup periods
Alternative investments have lockup periods anywhere between 3 - 10 years before you can withdraw your initial investment.
Although you will receive a return on investment during the lockup period, it is a disadvantage for those who want to withdraw their investments and start in another sector.
Who Are Alternative Investments Suitable For?
Alternative investments can be an excellent fit for anyone that wishes to diversify their portfolio.
However, it would depend on your level of interest in actively managing your investments.
Here are the categories of investors suitable for alternative investments:
Passive investors
Passive investors can enjoy huge returns that won't require more time to manage.
The investment models ideal for this type of investors are asset leasing, and fractional real estate.
This is because both of these don’t require you to actively manage them.
Retired or income-focused investor
For people close to retirement or looking for regular income, alternative investments give them an opportunity to earn a low-volatile income, identical to dividend investing.
So, investors can replace or supplement their income.
People in this category should explore fractional real estate and P2P lending alternative investments models.
In conclusion, alternative investments provide greater portfolio diversification and lower risk with high investment returns.
However, it would help to do your due diligence before selecting any alternative investments discussed in the article.
- Ivan