14 Sep Why Do People Consider Real Estate an “Alternative” Investment?
The dream of reaching a point of financial independence is one that more and more people are striving for, and in the pursuit of that goal, a stark realisation has become far more widespread than it once was. Exchanging time for money almost never works. Unless you are able to secure a ludicrously high salary—which most people do not—you will always be hampered by the finite number of hours that you can dedicate to work.
The true path to financial independence is one of investment. Investment opportunities can take the form of shares, commodities, or even creative endeavours such as writing a book. Increasingly, however, investors are turning to real estate and private equity investments to secure their financial futures.
Long Term Investment Strategy
Many investment strategies are long-term ventures, and this type of investment is no exception. Property, assuming it is looked after, will generally appreciate in value, but real estate markets are, by their very nature, volatile. Equity real estate investment may see several dips in value before reaching a point where the investor might want to cash out. There are also different property types, and different types of real estate assets may perform very differently at any given moment.
In the past, it was a certain type of person who invests in real estate, but the pool of investors turning to property is becoming larger and more diverse. Given the above, it can be natural to wonder why so many people are prepared to struggle with raising capital just to get on that property investment ladder.
One of the advantages that property has over other forms of investment, such as pension funds, or a private equity fund, is that there is an immediate and consistent return in most situations. Property owners will rent their properties out and generate positive cash flow from their investment without having to wait for a distant future when their investment comes to fruition.
When compared to pension funds—which do not generate any tangible returns until retirement age—or shares—which are far less reliable due to dividends being dependent on profits—it’s easy to see why property is so popular among investors and even fund managers. Of course, all asset types have their advantages, but easy to see why property is an asset class with a particular appeal.
It’s also worth noting that investing in property typically requires a higher starting capital than other asset classes. While it is possible to invest in a small amount in shares—albeit for a smaller return—an investor in property will need typically need tens of thousands in capital to get started with a small property. Unless an investor is already a high net worth individual, investing in property will require some raising of capital first.
What are the Risks of Having Private Equity Real Estate?
Property is not without its risks, as with any other type of asset. Indeed, many alternative investments carry more risk than conventional investments. In the case of property, one of those risks is the reduced liquidity of the investment. While investment generally is a patient game regardless of the asset class, property typically takes a much longer time to liquidate than other assets. That is if the investor wants to get the most out of their investment.
Another risk stems from the fact that more diligence is required on the part of the investor to ensure safe asset management. While an investor in shares can research the company in question before buying in, someone investing in private equity properties needs to ensure that the property they are buying is sound, that all legal issues are dealt with, and that they there are no foreseeable factors that could harm their investment, such as future construction plans near to the property.
One of the larger risks, however, is liability. An investor in shares or commodities is at risk of losing their capital, but they are not responsible for the assets they are investing in. As a property owner who rents out their property, they become liable for a range of things like the health and safety of the occupants. Failure to ensure those things are taken care of can be very costly.
Types of Real Estate Investment
There are plenty of different types of real estate investment, from umbrella partnerships to real estate syndications, from raw land to mobile home parks. Though not comprehensive, below is a list of different types of real estate investment;
- Umbrella Partnership Real Estate Investments
- Qualified Opportunity Zones
- Raw land
- Mobile home parks
- Co-working spaces
- Real estate syndications
As with any investment opportunity, it is important not to put all your eggs in one basket. Property is an effective asset to invest in, but it should form part of a diverse portfolio, not be the only thing on there. It is also a compelling option for those looking to earn money from their investments in the near term.