Alternative Investments

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Although common investments like stocks and mutual funds may be the first thing that comes to mind when you think about investing, there are plenty of other options out there. In fact, the number of options is increasing as you can easily find and invest in many different opportunities online.

Investments aside from stocks, bonds, and cash are typically considered “alternative investments“.  Because this definition only excludes a few types of investments, there are countless possibilities that could fall under the umbrella of an alternative investment.

In this article, we’ll cover more than 20 specific examples of alternative investments, and then we’ll look at some details like the pros and cons, and how much you should invest in alternative investments.

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Alternative Investments

Let’s take a look at many of the most common options. Of course, there are plenty of others out there, but this list should give you a lot of options if you’re looking to get started.

Real Estate

Real estate is one of the most popular investments, and there are many different ways that you can invest in real estate. Here are some of the options that you might want to consider.

1. Rental Properties

Investing in rental properties can be a great choice because it is a proven path that has helped to build wealth for many millionaires and billionaires. You could invest in income-generating assets like commercial properties, single-family homes, condos, duplexes, and apartment buildings.

Landlords make money through monthly rental income, as well as appreciation in the value of the real estate.

Another reason why this is an attractive option is that it can be done on a small scale or a large scale. You could purchase a single rental property or build a rental empire.

For more, please see our article How to Generate Income from Rental Property.

2. Real Estate Crowdfunding

Although owning rental property can be a great way to build wealth, not everyone wants to be a landlord. However, it’s possible to invest in real estate without the headaches and hassles that come with owning and managing property.

In recent years, real estate crowdfunding has opened the doors that allow more people to get started with real estate investing. As an investor, you can reap many of the benefits of real estate without the need to deal with managing the property or tenants, and you can get started with a much smaller amount of money.

There are many different platforms that allow you to invest, and a few different types of real estate crowdfunding platforms. Some platforms allow you to invest in individual properties, while others allow you to invest in portfolios of properties. Most platforms specialize in a particular type of property (such as commercial property, apartment buildings, single-family homes, etc.). Some options are available only to accredited investors and others are available to anyone (you’ll need a net worth of at least $1 million or an annual income of $200,000+ for single filers or $300,000+ for joint filers to qualify as an accredited investor).

Although there are many different real estate crowdfunding platforms out there, arguably the most popular right now is Fundrise. Fundrise is open to all investors (not just accredited investors) and you can get started with as little as $500. With Fundrise, you’ll be investing in a portfolio of properties rather than a single property, which helps to decrease your risk.

Fundrise

3. REITs

REITs (real estate investment trusts) are another excellent option if you want to invest in real estate without the need to own or manage any property. A REIT will own a portfolio of properties and generate ongoing income, which is then passed on to investors.

There are REITs that specialize in all different types of real estate, as well as some general REITs. There are also a few different classifications of REITs as some are publically traded and others are private. Publically-traded REITs offer liquidity since they can be sold at any time, but non-traded REITs will often offer better potential returns in exchange for the lack of liquidity.

4. Farmland

Another way to invest in real estate is to invest in farmland. Farmland can be an attractive investment because it produces on-going rental income as well as the potential for appreciation in value.

Crowdfunding has also made it far more possible and practical to invest in farmland, although (at this point) the farmland and agriculture crowdfunding platforms are open only to accredited investors. That means many investors won’t qualify at this time, and higher minimum investments are required.

Acre Trader is one of the leading platforms that makes it easy to invest in farmland. You’ll be investing in a specific property with a cash yield and an anticipated appreciation. The minimum investment will vary depending on the property, but typically minimums will range from about $3,000 to about $10,000.

Acre Trader

FarmTogether is another platform that is very similar to AcreTrader.

FarmTogether

5. Mobile Homes

Although real estate investing often focuses on apartment complexes and single-family homes, another viable option is to invest in mobile homes. Many mobile homes are located within specific communities where the tenant rents the land that their mobile home sits on, and others are located on privately-owned land.

As an investor, you can own (or own a share of) a community or individual mobile homes. Getting started with mobile homes can require less capital than traditional rental properties since the values are generally lower.

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6. Tax Liens

The last option that we’ll cover for investing in real estate is the tax lien. When a property owner does not pay their property tax bill the municipality can sell a tax lien to an investor. As the investor, you’ll be paying the property taxes and you’ll have the right to foreclose on the property if the owner does not pay you back, including interest.

The specific details of tax liens vary from state to state, with maximum interest rates being set. Investors are able to earn decent returns, but it does come with some risk, especially for those who aren’t experienced with tax liens.

In order to get this investment, typically you’ll need to win an auction based on the interest rate that you expect to be paid.

7. Art

Have you ever considered art as an investment? The artist is the most important factor. Fine art from world-class artists can prove to be a worthwhile investment, while work from unknown artists is unlikely to generate a decent return.

Unfortunately, the average person does not have the capital to purchase an original piece from a master like Andy Warhol or another blue-chip artist. However, Masterworks is a relatively new platform (open to all investors, not just accredited investors) that allows individuals to purchase shares of blue-chip art from renowned artists. Masterworks hand picks pieces that they expect to appreciate at 9-15% per year.

Masterworks

8. Royalties

You can purchase the ownership of royalties that allow you to make money from the work of artists and musicians. If they need to raise money, artists and musicians can sell the rights to royalties, and that leads to opportunities for investors.

Royalty Exchange is a platform where musicians can raise money, and people like you can invest and buy royalties.

Invest in Small Businesses

While you can easily invest in publicly-traded businesses through the stock market, there are also some alternative investments that make it possible to invest in private businesses. In many cases, you’ll be investing in small businesses that need funding for one reason or another. Here are some of the specific options.

9. Worthy Bonds

With Worthy Bonds you can invest as little as $10 and start earning a fixed interest rate of 5%. The bonds are a 36-month term, but you can cash them in at any time. Worthy Peer Capital issues loans to American small businesses, and the loans are secured by liquid assets (like inventory) that have a greater value than the loan, reducing the risk for investors.

Worthy Bonds

10. StreetShares

StreetShares is similar to Worthy Bonds, but they focus on veteran-owned businesses. As an investor, you’ll earn a 5% return for your investment that helps small businesses, many of which are owned by vets. You can start investing with as little as $25, but you’ll need to leave the money invested for at least one year in order to avoid fees.

11. FundingCircle

FundingCircle offers another way to invest in small businesses. Investors have historically received 5-7% returns and loan terms can be up to 5 years in length. Loans are issues to American small businesses that pass their approval process.

12. Kickfurther

Kickfurther allows you to invest in a way to will help small businesses to grow. One of the major challenges for many growing retail businesses (online or traditional) involves cash flow. Kickfurther helps businesses to raise money that will be used to purchase inventory.

Equity Crowdfunding

Equity crowdfunding makes it possible for anyone (not just accredited investors, although some platforms are open only to accredited investors) to invest in privately-owned businesses. Many startups and small businesses need to raise capital, and turning to crowdfunding is one of several options.

The difference between a Kickstarter campaign and equity crowdfunding is that backers through Kickstarter are typically investing by purchasing a product before it has been created. Once the product has been created and backers have received their product and any other benefits that were promised, the arrangement ends. But with equity crowdfunding, the investors are actually investing in the business with a long-term role.

13. Crowdfunder

Crowdfunder is a platform where you can browse available investments with a wide variety of startups. Most of the opportunities available through Crowdfunder are open only to accredited investors, and the minimums and specific details will vary depending from one opportunity to the next.

14. StartEngine

At StartEngine you can browse available investment opportunities in a wide variety of startups. There are investment options for both accredited and non-accredited investors with minimum investments that are often less than $1,000.

15. Gold, Silver, and Other Precious Metals

While several of the investments covered in this article have only become available in recent years or gained significant interest in recent years, gold is an investment that has been around far longer than the stock market. Silver and platinum also present options for investors.

There are many different ways to invest in precious metals, and particularly gold. You could purchase bullion, bars, or coins. You could also invest in ETFs or mutual funds that in turn invest in precious metals.

Vaulted is a new web and mobile app that makes it very easy to buy gold. Although Vaulted is new, it is backed by McAlvany Financial Group, which owns ICA, one of the largest and longest continuously operating full-service gold brokerage firms in the United States. The gold that you purchase through Vaulted will be stored securely for you at the Royal Canadian Mint, or you can choose to have it delivered to you.

Vaulted

16. Oil and Gas

Like precious metals, oil and natural gas have demand that makes them valuable, and there are a few different ways to invest. You could purchase stock in particular companies within the industry, buy mutual funds or ETFs that specialize in oil or gas, or invest in limited partnerships.

Although investments in oil and gas do offer potential for nice long-term gains, there are some significant risks that you need to be aware of. The biggest risk is price volatility. Prices for oil and gas tend to bounce around a lot, and that makes your investment less stable. If you’re investing in specific companies, there is also a risk of a catastrophe like an oil spill. For example, BP stock fell approximately 50% in 2010 due to a spill in the Gulf of Mexico.

17. Life Settlements

Life settlements are a type of alternative investment that doesn’t get as much attention or publicity as some of the others covered in this article. Maybe part of that reason is because it’s a bit morbid to discuss.

Life settlement involves someone selling their life insurance policy. The price paid for the policy is typically less than the death benefit but more than the cash value of the policy. After the transaction, the investor continues to pay premiums on the policy and then collects the benefit after the insured’s death.

You can invest in funds that manage and invest in life settlements. The appeal of this investment is:

  • The historical returns are strong
  • The risk if often viewed as low, relative to the high potential for gains
  • It is completely uninfluenced by the stock market

18. Structured Settlements

A structured settlement happens when someone wins a lawsuit and is awarded payment over a set period of time. For example, someone seriously injured in an accident may receive a series of payments over the course of several years.

However, the plaintiff who is awarded the money may prefer to have cash in a lump sum now rather than waiting for all of the payments to be made, which can take many years in some cases. There are companies out there that will purchase the structured settlements. That company pays the plaintiff a lump sum and the payments are then made to that company going forward.

This type of investment can be appealing because they are usually held by very strong, stable insurance companies viewed as low risk. However, the investment tends to be extremely illiquid, which presents other issues for potential investors.

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19. Antiques and Collectibles

Certain antiques and collectibles, including coins, can be seen as alternative investments. Hopefully, any investments that you make in collectibles turn out better than my “investments” in sports trading cards when I was a kid in the 1980s and early ’90s.

Many people choose to invest in collectibles partly as a hobby and not strictly as a typical investment. Antiques and collectibles can be difficult to sell or even to determine a true value, and price swings can also be significant.

Like any other investment, it’s a good practice to have strong knowledge and understanding of any antiques or collectibles that you invest in.

20. Hedge Funds

A hedge fund is a partnership where a fund manager manages the pooled assets that have been invested by investors participating in the hedge fund. They are open only to accredited investors and typically come with very high minimum investments, so they are an option for only a small percentage of investors.

The goal of a hedge fund is to increase return and minimize risk, however, many people view hedge funds as a high-risk investment. Hedge fund investors hope to make money on their investment in any market condition.

Bonus

Above, we’ve looked at 20 specific alternative investment options. There are also a few companies that specialize in providing alternative investments of various kinds. I’m including this as a “bonus” section in this article because these companies offer some of the investment types already listed above and they are more of a vehicle for finding the right investments rather than a separate type of investment.

YieldStreet

YieldStreet aims to help investors generate passive income with alternative investments. You’ll need to be an accredited investor in order to invest in any of the offerings currently listed at YieldStreet, although their website mentions that they are exploring ways to open some investments to everyone.

At YieldStreet you’ll find different investment offerings that are open to new investors for a relatively short period of time. There are usually not more than a couple investments open at any particular time. Investments include art, real estate, settlements, and more.

Cadence

Cadence is somewhat similar to YieldStreet. They aim to provide investors with greater than 10% returns on short-term investments (less than 12 months). There are typically a few investment opportunities available able each month, but you’ll need to create a free account in order to see the investments that are open.

Like YieldStreet, the investments available through Cadence are currently only open to accredited investors. However, the minimum investment of just $500 is very low.

Pros of Alternative Investments

Here are some of the reasons why you may want to consider alternative investments. Please keep in mind that the details of each investment are different and not all of these will apply to each opportunity.

Diversification

Many investors turn to alternatives as a way to create a more diverse portfolio rather than having everything wrapped up in stocks, bonds, and cash.

Potential for Higher Returns

Some alternative investments are attractive simply because they offer a high ceiling that may not be possible with other types of investments.

Income Source

Some, but not all, alternative investments can serve as a source of investment through dividends or rental income. If living off dividends is your goal, you should consider adding some alternative investments to your portfolio.

Not Dependent on the Stock Market

Some alternative investments are not impacted by the stock market (or at least, not directly impacted). These types of investments can be very attractive because of the potential to somewhat protect your portfolio during rough economic conditions.

Tax Benefits

In some cases and certain situations, an alternative investment may offer a more favorable tax treatment than other types of investments. Please consult a tax professional for advice related to your personal situation and the specific investments that you are considering.

Cons of Alternative Investments

While there are some significant reasons to consider alternative investments, there are also some drawbacks.

Risk of Loss

While the level of risk will vary from one investment to another, in general, alternative investments will involve risk. There are certainly some options available that are considered to be more conservative, but some alternative investments are not regulated, or are lightly regulated, and come with the risk of partial or complete loss.

Unfamiliar

Part of the reason that alternative investments can be a little riskier than more traditional investments is due to the fact that they tend to be less familiar to most investors.

As a general rule, it’s not advisable to invest in anything that you don’t understand, and that means that you may need to do more research before moving forward with an alternative investment. If you choose to invest without sufficient due diligence, you’re more likely to expose yourself to risk.

Tax Complications

Although there can be some tax advantages to alternative investments, there are also potential complications, which is one of the reasons why it is a good idea to speak with a tax professional before making an investment.

Some Options Require a High Minimum Investment

While the details for each investment will vary, some require a high minimum balance that may be out of reach for some investors. Although this is true, there are definitely some alternative investments covered in this article that don’t require a lot of money to start investing. There are options for everyone, but you’ll have more options if you have a large amount to invest.

Some are Only Open to Accredited Investors

Again, the details of each investment will vary, but there are several investments covered in this article that tend to be open only to accredited investors. That means that only a small percentage of people will really be able to pursue those investments.

How Much Should You Invest in Alternatives?

Now that we’ve looked at all of the details of alternative investments, you may be wondering, “How much should I invest in alternatives?” Of course, the answer will depend on several different variables. Depending on who is providing the advice, you may find recommendations to invest anywhere from 3% – 20% of your portfolio in alternatives (somewhere around 10% is common advice).

It’s also important to keep in mind that “alternative investments” is a very broad term. Many of the investments that fall into this category are completely different from each other and have no correlation to one another, and they can serve different purposes within a portfolio.

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