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Modern Portfolio Theory is an investment strategy, often used by institutional investors, that suggests 10-20% of your total portfolio should be allocated to alternatives. By investing away from the public markets, alternative investments help diversify your portfolio. To put it simply, it’s the financial world’s equivalent of “don’t put all your eggs in one basket”.
With all the buzz around cryptocurrency, bitcoin, and NFTs, it’s easy to think of alternative investments as “trendy”, but there’s one type of alternative investment that has not only been around longer than any other, it’s here to stay: real estate.
- You don’t have to be a landlord or featured in Forbes.
- How does real estate crowdfunding work?
- What makes real estate a strong alternative investment?
- Where’s a good place to start if I want to invest in real estate?
You don’t have to be a landlord or featured in Forbes.
If the first thing that comes to your mind is that no amount of money is worth the hassle of being a landlord, or that you couldn’t possibly afford to invest in something as expensive as real estate, think again.
Yes, historically most private equity real estate investments were only available to institutional investors (hedge funds, university endowments, pension funds), and the wealthy and well-connected. However, the passing of the 2012 JOBS Act changed the game by allowing small and mid-sized real estate firms to use crowdfunding as a way to raise capital from individual investors. Crowdfunding platforms like CrowdStreet have given thousands of individual investors across the U.S. access to institutional-quality real estate investments. These alternative investments provide those investors with the opportunity to earn passive income, diversify their portfolios, and help their portfolio ride out market volatility.
How does real estate crowdfunding work?
Real estate crowdfunding allows individuals to collectively invest in large real estate projects that would otherwise be too big for them to invest in alone. This can include everything from life sciences labs in the nation’s top research hubs to hotels in the most popular tourist destinations, or new multifamily properties in expanding metros. As a passive investor, you’re not responsible for finding reliable tenants, handling late-night emergencies, or worrying about day-to-day property upkeep, but you can still reap the benefits of owning real estate.
Depending on the business plan, your investment can potentially generate regular cash flow from ongoing distributions and/or a share of the final sale price of the property. Generally, established commercial properties leased to quality tenants with steady monthly rents are more likely to distribute regular cash flow back to investors. On the other hand, properties that are under construction or require major renovations may mean less cash flow in the short term, but the potential for a larger payout once sold. It’s up to you to decide what kind of investment works best for you and your portfolio, and what your investment objectives are.
As always, all investing involves risk. There is always the chance the project underperforms and you lose your initial investment.
What makes real estate a strong alternative investment?
Real estate is the third-largest asset class in the U.S., behind stocks and bonds.
What does that mean for you? Opportunity. Worth an estimated $16 trillion in 2018, the world’s biggest institutions have invested huge sums of money into real estate. Among them is the Harvard Management Company, which manages Harvard University’s $53.2 billion endowment.
Real estate is a long-term, illiquid investment that can potentially help insulate your portfolio.
With hold periods generally ranging anywhere from 2-10+ years, real estate is considered an illiquid investment, meaning you don’t get to choose when you sell or trade your investment once it’s been made. But why can that be good? It can be a natural barrier to the emotional rollercoaster of investing. How often have you bought or sold your shares based on the latest news cycle, only to wish you hadn’t a short time later? Investing in real estate can also potentially be a hedge against inflation, as property values tend to stay on a steady upward curve over time, even as the value of the dollar may fluctuate.
Real estate investments are often less volatile than stock market investments, as their value is not directly tied to the whims of the public market. A perfect recent example is the plummeting stock prices of Peloton after a character had a heart attack riding their bike in the season opener of the Sex and the City reboot. Real estate has a layer of protection from the ups and downs of the U.S. public market, often driven by consumer confidence because its value is determined by several factors including national and regional trends, the local market, consumer demand, and more.
Where’s a good place to start if I want to invest in real estate?
Named Best Overall Crowdfunding Site of 2021 by Investopedia, CrowdStreet has built strong and trusted relationships with more than 250 best-in-class real estate firms across the U.S. Our Marketplace features institutional-quality real estate investment opportunities from across the country in nearly every asset class. Recently funded projects include an apartment community at West Bay Village at Disney, a hospitality development project in the heart of Washington D.C., and a life sciences lab development project in Boston (the #1 life sciences market in the nation).
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This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. CrowdStreet is not a registered broker-dealer or investment adviser. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. CrowdStreet’s review process of the Issuer and deal should not be construed as a recommendation or a solicitation to buy. All investors should consider their individual factors in consultation with a professional advisor when deciding if an investment is appropriate.
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