Are you looking for the best alternative investments to make money? Look no further than real estate. In an inflationary environment, real estate is a good choice. Inflation acts as a tailwind for real estate values and whittles down the real cost of mortgage debt.
Real estate is one of the best asset classes to build long term wealth. As an owner of five properties (3 in San Francisco, 1 in Lake Tahoe, 1 in Honolulu), I've seen my net worth soar over the past 15 years as my principal values and rents have increased far beyond inflation. Real estate alone accounts for roughly $200,000 in gross passive income a year.
Now that I'm over 40, my attitude towards buying more physical real estate has changed because of three key reasons:
1) Property taxes. I'm already paying $50,000 a year in property taxes.
2) Dealing with bad tenants. Most of my stress comes from dealing with bad tenants who wreck my property or don't pay rent on time.
3) Too much financial risk. To add hundreds of thousands of dollars in illiquid real estate exposure near the top market in coastal cities sounds like a bad move.
Best Alternative Investments To Make Money: Real Estate
Real estate crowdsourcing is the best alternative investment I've found for investors who want to continue investing in real estate, but more surgically with lower amounts, for potentially higher returns, and less hassle.
Below is a snapshot of the famous Yale University endowment asset allocation. The endowment has over $23B in assets under management. Notice how they have 14% of their endowment in real estate, and less than 10% of their assets in public equity and fixed income.
Best Real Estate Investing Platform
Based on my first-hand research meeting with various real estate crowdsourcing CEOs and testing out their platforms, I've decided that Fundrise is the best real estate crowdsourcing platform today for retail investors such as yourself. Fundraise was founded in 2012, and are pioneers in the eREIT space.
Fundrise offers private eREITs and eFUNDS to help investors diversify into real estate in a less volatile way than publicly-traded REITs. You don't have to leverage up to buy real estate with Fundrise either, which is safer and more conservative.
One of the best things about Fundrise is how vigorous their vetting process is of deals that make it on their platform. Only 5% of the deals they see are approved, giving more confidence to investors that what they are reviewing has already been thoroughly reviewed already.
Fundrise Sign-up Process
The sign up process is easy and free.
Step 1: Input your first name, last name, telephone number
Step 2: Self accredit by choosing how you are accredited: income, net worth, joint income, or business
Step 3: Link a checking account or skip to first explore the various investments.
Step 4: Verify your e-mail address.
Step 5: Explore the platform for free
Deciding Between Growth Or Income
One of the reasons why real estate is one of the best alternative investments is due to its flexibility. You're either looking to invest in growth or income on the Fundrise platform. My main focus is income given I'm satisfied with my current financial nut.
Three main investment categories:
1) Single family residential property. Target 9% – 11% annual return. You are the senior debt holder (first position on lien). The investment duration is usually 6 – 24 months and income usually paid out monthly. This product is considered their least risky investment for investors and has been around since the beginning. Roughly 40% – 45% of total investments on the platform are in this category. Institutional real estate investors are buying up single family residences aggressively post pandemic.
2) Preferred Equity/Mezzanine debt. Target 12% – 14% annual return. You provide bridge loan for sponsors and are a lower position in the capital stack. The investment period is usually 2 -3 years. Investments are mostly in commercial property. Roughly 20% – 25% of total investments on the platform are in this category. This is where I will probably focus most of my investments since I already own single family residences.
3) Joint venture equity. Target 10% – 16% annual return. You are an equity owner alongside the sponsor and take part in profits once preferred returns are hit. Typical duration is 5 years, but can be as short as 3 years. Income is usually paid quarterly once the deal is closed. This category accounts for roughly 25% – 30% of all investments.
Below are the main investment plans for Fundrise.
More Important Information
Real estate crowdsourcing is considered an Alternative asset class. Many private wealth advisors recommend a 10% – 20% allocation. Meanwhile, we know that some large university endowments invest 50% or greater in Alternatives. The whole idea of investing in Alternatives is to capture outsized returns from inefficient markets.
The minimum investment is usually $5,000, but it can go as low as $1,000 for certain investment opportunities. Equity investment minimums are usually higher because there can only be a total of 99 investors per deal, and the sponsor may require more capital depending on the deal.
To generate revenue, Fundrise take a 2.5% to 3% origination fee on the debt it raises for projects. On equity investments the company takes a cost reimbursement and makes a 1% to 2% percent management fee. That's better than me paying a property manager one month's rent (8.33%).
Finally, there have been 134 investments successfully completed so far, and there are currently 240+ active investments on the platform. I want to find cap rates in the Midwest or South that are over 10% compared to just 2% – 4% in SF and Honolulu for diversification purposes.
Regions Of Opportunity
Below is a map of Fundrise's current investment offerings. The arrows are where I'm focused on deploying capital. Texas, Alabama, Utah, Nebraska, Mississippi, Louisiana, and Georgia are my top picks due to higher cap rates (returns). If anybody is from one of these states, please share how the real estate investment environment is.
You can read my latest comprehensive Fundrise overview for more information. It is truly one of the best alternative investments to make money.
Surgically Deploy Capital
Instead of overly concentrating new money into one very expensive property, I'm now going to surgically deploy capital into multiple types of investments with potentially greater returns, less hassle, and more liquidity across the country.
If you're looking for yield in this low interest rate environment, don't want the hassle of managing rental properties, don't have the downpayment for a physical property, want to more easily allocate real estate dollars around the country, and are looking to diversify your investment portfolio with real estate exposure, take a look at the Fundrise platform.
I've personally invested $954,000 in real estate crowdfunding to diversify my holdings and earn income 100% passively.
Invest In Venture Capital As Well
Also check out the Fundrise Innovation Fund if you want to invest in promising startups. The fund invests in private growth companies in AI, property tech, data infrastructure, and fintech.
What's great about the fund is that the investment minimum is only $10 and you get to see the portfolio composition before making an investment!
You can also listen to my hour-long conversation with Ben Miller, CEO of Fundrise, about venture capital and why he's so bullish on artificial intelligence and more.
About the Author
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income.
Sam owns three properties in San Francisco, one property in Lake Tahoe, and another property in Honolulu. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.