Real estate is considered the world’s oldest asset class, and the managed real estate market is now worth over $11.4 trillion as of July 2022, which is just a small fraction of the $217 trillion in global real estate value.
Popular investment options include rental properties and real estate investment trusts (REITs). However, amidst the remaining uncertainty in the market, it’s wise to look for alternative real estate investment options.
In this article, we’ll explore a few alternatives, including:
- Real Estate Limited Partnerships (RELPs)
- Impact investing
- Hard money loans
- Investing in yourself
Without further ado, let’s dive in.
Real Estate Limited Partnerships (RELPs)
Real estate partnerships are a popular way to invest in real estate. Two or more parties agree to contribute money, property, labor, and/or expertise toward the ownership of a project. In return for their investment, investors receive a portion of the profits from that project once it is complete.
Since these investments involve multiple investors, they are generally considered less risky. While there's no guarantee that your investment will be profitable (or even that it will get built), they're also not as susceptible to market fluctuations since you'll share risks with other investors.
Real estate partnerships have been popular investments among accredited and non-accredited investors. However, using this method of investing isn't for everyone — especially if you don’t know much about real estate.
Real estate partnerships are commonly formed as Limited Liability Partnerships (LLPs), although they can take many forms, including crowdfunding campaigns, joint venture agreements, or simply written agreements between friends.
Real estate crowdfunding, in particular, is experiencing rapid growth, with platforms like DiversyFund for REIT crowdfunding, EquityMultiple for CRE crowdfunding, and PeerStreet for real estate loan crowdfunding.
Real estate partnerships typically include sponsors, investors, and managers.
A real estate project sponsor is responsible for finding funding, acquiring the property, and managing its development. The sponsor is also responsible for collecting monthly payments from investors. Further, sponsors typically provide a modest “skin in the game” investment of 5-10% equity.
Investors in a real estate partnership are paid out of the profits generated by the property after it's completed. The investment process can be complicated, but you're sharing risks with other investors — who knows if that building will be profitable?
Managers are responsible for managing the project and ensuring that all parties involved in its development follow through on their obligations (including ensuring tenants pay rent). If a tenant doesn't pay rent or violates any other contract obligation, it may result in deductions from investor profits.
In addition to managing the property (which may include hiring contractors), managers have to oversee all aspects of legal compliance regarding obtaining permits and licenses required by local authorities.
Real estate impact investing is an increasingly popular niche of the broader impact investing market, which a 2020 World Bank study estimates worth over $2 trillion.
Let’s look at three real estate impact investing areas: Green real estate, affordable housing, and sustainable communities.
Green real estate
Investing in green real estate is an increasingly popular alternative to traditional real estate investing.
Green buildings use less energy and are good for the environment. Green building standards are set by the U.S. Green Building Council (USGBC). The USGBC sets scorecards on how a building should be constructed, operated, and maintained, including points on energy efficiency, access to daylight, water usage efficiency, and indoor environmental quality.
Besides the LEED standard by USGBC, another popular standard is BREEAM (Building Research Establishment Environmental Assessment Method).
To meet these standards, apartment owners can invest in capital improvements such as energy retrofits, HVAC systems upgrades, elevator replacements or repairs, roof replacements, and so on, all of which reduce operating expenses and improve property values.
Beyond contributing to impact metrics, green real estate may outperform its traditional counterparts. A Journal of Sustainable Real Estate study found that “REITs with more green assets registered higher return on assets” between 2005 and 2017. Another study found that “REITs with a higher fraction of green properties display significantly lower market betas,” largely because they’re less exposed to energy price fluctuations and occupancy risks.
In short, green real estate helps institutions achieve impact metrics, boost returns, and decrease volatility.
Low-income housing offers several benefits: It’s historically more stable in a market downturn, less volatile, and typically has better credit quality than class-A, according to Kelsi Borland via GlobeSt.com.
The search for decreased market exposure and rising demand for affordable housing has led to a recent boom in this alternative investment class. Avanath, an RE investment firm focused on affordable and workforce housing closed with $760 million in commitments in January 2021.
According to Scott Alter, Co-Founder and Principal of Standard Communities, during the COVID-19 pandemic, investors in market-rate property saw collections dip five to ten percent. In contrast, investors in affordable housing didn’t see a drop-off.
Affordable housing extends beyond traditional low-income apartment units to mobile home park investing. In the US, around 18 million people live in mobile home parks, which offer investors low maintenance, high returns, and overall affordability. There are many different options for investing, such as owning just the home or the land, or both, or owning the park and seller financing the homes.
Sustainable community investing is investing in real estate projects that help revitalize neighborhoods and communities. Sustainable community investors are looking for investments with long-term potential, which is why there are many options for sustainable community investing.
Some of the most popular sustainable community investment opportunities include:
- Urban infill development (“filling in the gaps” on vacant or undeveloped land)
- Mixed-use construction (several profit-producing uses in one building)
- Commercial redevelopment (e.g., adaptive re-use of historic buildings)
Sustainable community investing has been around for quite some time now – it’s just not as well known or talked about as it should be. The idea behind sustainable communities is simple – promote environmental responsibility while supporting local communities' economic health through job creation and a strong sense of place.
Hard money loans
A hard money loan is backed by the value of a physical asset, such as a home. In real estate investing, investors may obtain a hard money loan when they want to renovate a property.
These are short-term loans issued by private investors that offer passive income, typically more yield than other passive assets like bonds or dividend stocks. As Forbes reports, these loans typically carry an interest rate of 10 to 15%.
Since the duration term is short, returns are naturally quicker than something like a mortgage. Not only that, but when applying for a mortgage, it can take months to close on a loan, putting investors at risk of losing out on a property. With a hard money loan, it’s possible to get funding in weeks, which is important for large-scale development projects.
When investing in hard money loans, it’s crucial to have a thorough due diligence process, such as conducting a background check and inspecting the property.
According to the American Association of Private Lenders, It’s estimated that there are over 8,300 hard money lenders, and this number continues to grow as investors seek outsized real estate returns quickly and conveniently.
Alternative real estate investments can help investors reduce risk, contribute to impact initiatives, and generate outsized returns.
With Gridline, you can gain exposure to private real estate investment funds with lower minimum investment requirements, transparent fees, and the potential for greater liquidity.
This opens the world of alternative real estate investment to everyone. Our approach is simple: We provide access to the masses through a marketplace to search for investment opportunities at your fingertips and build an optimized portfolio while we handle the back-office work.
Real estate is the backbone of every economy. You can also invest in the world’s oldest asset class.