Residential and commercial real estate have always held a dominant position in the real estate investment market. These asset classes have a strong track record of stability and returns, but they may not be as widely available or have as much room to develop as they potentially can.
For example, the average down payment for a single-family house in the US has reached 6%-17% of the home price for buyers, according to a 2022 study by the National Association of Realtors, making it harder for many investors to enter the market. Here’s where investing opportunities in alternative real estate arise.
“Alternative real estate investment presents a strong route for investors looking to diversify their holdings,” notes Jean Paul Wardy, CEO of CenterCal Properties. “It may bring them higher returns, and hidden value in the real estate market over time,” he adds. Investors might discover new asset classes with major growth and income creation potential by branching out from typical properties and exploring real estate investment alternatives.
Exploring Alternative Real Estate Options
Conventional real estate investments are mainly concentrated on properties that can generate revenue, such as office buildings or flats. On the other hand, the alternative real estate market provides a wide array of choices to suit varying risk tolerances and investment objectives.
Here is a more detailed look at some of the main categories of alternative real estate investments:
Land Banking
Land banking refers to the practice of buying undeveloped land to hold it for future development. Land banking might be especially alluring in places where there is a population increase or close to developing cities.
Examples include raw property on the outskirts of a city with plans for commercial expansion, or farmland with the potential for future residential development.
Self-Storage Facilities
The need for self-storage facilities is rising because of consumerism and urbanization. These establishments provide safe storage areas for people and companies, frequently on a month-to-month basis. Storage demands are dynamic and continuous; therefore, investing in self-storage facilities can yield a consistent income stream from rentals.
Student Accommodation
Given the steep rise in enrolment at universities and colleges, there is a steady need for high-quality student accommodation. Acquiring real estate close to academic establishments might provide consistent rental returns and possibly capitalize on the growth in property values as the number of students increases.
Medical Facilities
Senior housing and healthcare facilities are becoming increasingly important as the world’s population ages. Putting money into healthcare facilities, such as assisted living complexes or outpatient clinics, can give you access to a market that is expanding and has steady demand.
Warehouse Facilities
The need for warehouses and distribution facilities has expanded dramatically due to the e-commerce boom. These facilities are essential for keeping track of and completing online orders, and as e-commerce expands, so too will their strategic significance. Purchasing distribution facilities and warehouses can result in steady rental income growth and high occupancy rates.
Cell Phone Towers
Cell phone towers are particularly distinctive as an alternative real estate investment. Telecommunications firms need them to offer network coverage, and they often sign long-term lease agreements with tower owners. Because of the long-term leases, investing in cell phone towers provides a consistent revenue stream with little management requirements.
Real Estate Investment Trusts (REITs)
Investors can take part in the real estate market through REITs even if they do not physically own or manage buildings. These investment trusts manage and maintain a portfolio of properties that generate revenue, and they pay dividends to shareholders from a percentage of their earnings. Compared to buying complete properties, REITs have a lower entrance hurdle and offer diversification across various real estate markets.
Advantages of Alternative Real Estate Investments
Traditional real estate provides stability, but with the right technique, investors can possibly gain several benefits from alternative investments. Here are some notable advantages:
#1 Possibility of Higher Returns
Compared to conventional choices like office buildings or apartments, alternative real estate asset classes, such as self-storage facilities or warehouses in in-demand regions, may provide higher rental returns. Those looking to maximize their profits on investments may find them very alluring.
#2 Diversification
By including alternative real estate possibilities in their portfolio, investors can distribute the investment risk over various assets. Such diversification reduces the effects of a downturn in any one real estate market sector. For instance, steady rental revenue from a student housing property may act as a buffer in your portfolio if vacancy rates rise in office buildings.
#3 Reduced Entry Barrier
Some alternative real estate investments, such as REITs, demand a far smaller initial expenditure than buying a complete property. This increases their accessibility for a larger group of investors, especially for individuals without the funds to purchase a conventional property outright.
#5 Inflation Hedging
Generally speaking, real estate can serve as an inflation hedge. Property values typically rise in tandem with inflation, which may shield your investment from inflation’s depleting impacts. This benefit may be especially relevant for alternative real estate assets with significant underlying demand, such as healthcare facilities or cell phone towers.
#6 Possibility of Passive Income
Creating passive income is a possibility with a lot of alternative real estate investments. This can take the shape of dividend payments from REITs or rent collection from tenants in buildings such as self-storage centers or dorms for students. Investors can profit from passive income without having to take on the obligations of active property management.
Considerations and Challenges
Although investing in alternative real estate has exciting opportunities, it’s important to be aware of the potential difficulties involved:
Greater Risk: Compared to traditional real estate, some alternative real estate assets may be less liquid. This makes it more challenging to sell them fast in an emergency. Furthermore, vacancy risks associated with specific asset classes, such as land banking, might increase based on market conditions and development schedules. It is crucial to conduct thorough research and have a solid grasp of the unique hazards connected to each investment.
Exercise Due Diligence: Before making any alternative real estate investments, careful market study and analysis are essential. Investors must evaluate variables such as regional demography, asset class-specific economic trends, and possible regulatory obstacles. To help you through the due diligence process, speaking with a financial advisor with experience in alternative real estate is highly recommended.
Property Management: Management expertise is necessary to maintain effective development or tenant relations in many alternative assets, such as land banking or student housing properties, even though some of them offer passive income. Investors must budget for the expense of hiring a professional property management company or be ready to manage the property themselves.
Regulatory Environment: It is important to comprehend the regulations that apply to various alternative real estate ventures. Permit requirements, building rules, and zoning laws might change based on the type of property and location. Getting advice from legal and regulatory professionals can help guarantee that pertinent regulations are followed.
Conclusion
Alternative real estate investing is an attractive route for investors looking to diversify their holdings, possibly earn higher returns, and uncover value outside conventional real estate possibilities. Alternative investments are expected to become increasingly important as the real estate market develops, providing investors with savvy and well-informed approaches with interesting options.
The wide range of investment options, from cell phone towers to land banks, accommodates different risk tolerances and aims. However, effectively navigating this arena requires meticulous due research, a solid grasp of the hazards involved, and professional advice for property management.