The Different Categories of Alternative Investments & How to Add Them to Your Portfolio
Take the quiz - How Alternative Investments Can Fit In Your Portfolio
-
Introduction to the Podcast
Welcome to the Unconventional Investor Podcast. I'm your host, Michelle Moses, certified financial planner, licensed realtor, and founder of ME Financial. If you're an accredited investor feeling overwhelmed by managing your portfolio and looking for alternative investment strategies that go beyond the traditional stock market, you're in the right place.
Let's head into today's episode so you can start taking control of your financial future. Hello everyone and welcome to the podcast. Thank you so much for listening.
Overview of Alternative Investments
Today we are going to talk about the different categories of alternative investments, and this is just the way that I am splitting them up.
And if you are on my website and you take the quiz, this is the way that they are split up because people often wonder how can they fit in? Can. To your particular portfolio, do you just pick any alternative? Are they all the same?And I am here to tell you that they are very different.
Much like you would pick, your stocks and bonds and all the different investments that you have with all these mutual funds. What is your goal? Are you trying to keep it safe? Are you trying [00:01:00] to grow it for 30 years? Ordo you just have 10 years? And so it really depends on.
What your goals are and what you're comfortable with. So I wanna talk about the different categories that I split them up into and the ways that I then recommend them to people. And then we'll talk a little bit about some of the strategies that go along with some of these. So the four categories.
That I split them up is growth, income a mixed, and then just pure real estate. And that is just owning the pure real estate, the actual property itself.
Real Estate Investments
So why don't we, let's start with that one, because that is the easiest when I say real estate, everybody knows what I'm talking about.
You can choose, say, commercial property. You might buy one building. You might buy a house on your own with your IRA. But if you listen to another episode, we recommend against that just 'cause it takes so much paperwork and rules and regulations. But you can get into an alternative [00:02:00] investment.
Where does buying one single. Property and a lot of them call them like sidecar deals, where it's like, Hey, we have a really great opportunity in this one particular commercial property with these office buildings. And it might be mixed with some, a different rentals or some retail that's down below, or there's a hotel that is right on the beach and it's in this super hot spot.
So it doesn't take that much for. People I usually see these is when it's like a hotspot and it's like a special deal where it's just gonna be owning like one type of property of real estate. And you're gonna find a lot of alternative investments are real estate based. And they're just now getting into some of the business ones.
And I, when you google alternative investments, you're gonna see it say private equity cryptocurrency. And when I'm talking about alternative investments, I, I am talking about those, but the ones that I have the authority to sell are what are called in the retail channel. [00:03:00] They are for financial advisors to sell.
These people try to raise money for their particular deal and they're going to financial advisors to say, Hey, we want. People to invest in this at a hundred thousand dollars at a time, or $50,000 or two 50 whatever it happens to be, butthey are, they've done all of the paperwork that is included to be able to do that.
Okay? It needs to be structured in a certain way. When you go on Google and you're looking at. Different alternative investments. It's gonna say some sort of private equity thing. You can absolutely have a person that you talk to. Your friend says, Hey, I wanna start a fitness app. Can loan me $25,000?
That would be like technically a private equity raise you could invest in. I've had some people bring me things that are for nonprofits that. One interesting one. The cannabis industry was a big [00:04:00] one where people were doing a lot of private equity. And so those types of things, when you see those online, that's not necessarily what I'm talking about because that would be directly, that would be you deciding what you wanted to invest in and then you could directly invest with that company.
I am more in the investment field, obviously, and that's why I'm splitting these up into these different categories so that you can then fit them in your. Into your portfolio. So you would have like your stock investing and then you would take some of your either brokerage account or your IRA and then you would invest it into some of these alternative investments that are not in the stock market.
So real estate is one of those categories.
Growth Investments
The other category that we're gonna talk about is growth investing. And this one focuses just on capital appreciation. So you want to think more long term. That you are investing in something and it's going to take many years in order for the profit to come to fruition.
A lot of times these are development deals they are looking for money to [00:05:00] build like a retirement home. They're looking for money to build student housing, and they literally have the dirt and and then obviously it takes time to build the building and then it takes time to lease it out in order for them to then start making money.
And depending on the investment, they'll sell it right away after it's been built and leased a little bit. They usually have a certain percentage that they want to lease it up to, 50% lease,60% lease, that kind of thing. And then they will sell it, and then you can get out of it.
Sometimes they'll just refinance it because obviously the building leased is worth more than just the dirt. And the idea of having the building there that is the. Most common type of growth investment that there is out there. And obviously if that was something that you wanted to put in your portfolio, you would need to have that time horizon.
'Cause a lot of times those are the five to seven year deals where it's, we're going to build this, we still have [00:06:00] permitting. COVID really messed all of that up because then lumber prices and then there was no labor and then they had to not build for a little bit. The cost of the money went up.
So there's a lot that goes into that. And you've just gotta be able to weather the storm and wait for that return to come back to you. And if that is your time horizon and you're really excited about the project, totally fine. It's just that you need to be able to have the time horizon. I have some retirees, they are real, they love alternatives, but they're, I say something like that and they're like no, that's too long.
I'll be, 87 years old. You just wanna make sure the time horizon is fitting and then obviously that it's a good investment. The other category is income. And I think you need to think of this as just like you would with a bond if you were buying a bond or a utility stock and it gets paid to you every single quarter or.
Or a month or year or whatever it is that these types of investments, these alternative investments that are income based, those are also paying you a dividend on a regular basis.[00:07:00] So sometimes these are, a lot of the hard money lending ones are income based. The ones where they're already leased multifamily would be a good one.
Hotels is a good one. These are where people are staying. They're paying to stay, and then you're making part of whatever that income is. These are great. They, these do run the gamut, I should say. So you've got some companies that are newer and, you got like the hard money lending going on, and those are like with house flippers, right?
So they're doing hard money lending to some of these house flippers. And you're making money on a regular basis, but then it's. Just a little riskier, because you're, you've got the housing market, whereas there's some of these companies that are, they're huge behemoths. Okay. And I'll have some of them on the show, but they are more of an income play where you are more of a tried and true and they know what they're doing.
They have got. Connections all over the United States, you're not gonna make as much just because there's more hands in the pot. And, they have the leasing office and they have, all the people in their [00:08:00] office to, to run it. And the more overhead you have, the more fees that they have to charge and all that.
But a lot of the, the income and if you're looking for just regular income, the, if you're, you want to think about like leasing or lending money is usually where these things the category that these things fall into and I it where you, where people get hung up on this is it does create taxable income if it's not inside your IRA.
And so that's where you really want to get clear on what you want. My idea too is that you would. Go into retirement. If you did have some of these income, this would be a great time to, if you were just going into retirement, to get some of these income investments going so that you knew exactly what you were going to make on a monthly basis.
And even better if you do it inside your Roth IRA, so that income is tax free. And I, I, people really like the income ones. The growth ones are harder just because if you're not. Used to [00:09:00] investing in these types of things, and you have to wait five to seven years to get any of your money back, and all you're getting is, A PDF or an email update about the investment.
You might not like that. You might want to see some inve, you need to see some return on it. So some of the first time investors and alternatives, I will never put them in something growth because you do not see anything money and they're like what is this even gonna pay out? And what the heck is going on with it?
They want to see some dividends. They want to see like a quarterly, something coming in. So the growth. Tends to be for the younger people or for the not, I wouldn't say young, but accredited investors that are on the younger side that have the timeline, but they also have experience with investing and so they're not as worried.
And it's good to like mix these up so that you've got the boring growth and then you also have, the income one that is paying on a more regular basis.
Mixed Investments
And the last category that I do is mixed. And this would be a mix between the income and the growth. And a lot of these are let's take for [00:10:00] example ,I have another episode about Peachtree Hotel Group.
And I. Love them. So that's why I keep bringing them up. But they buy hotels, fix them up and run them, and then they might sell them or they might keep them. That would be a great mixed use because they also have the ability to lend money to people that own hotels. So if the. If it's a mixed fund, the it, they have the ability, the manager has the ability to not only purchase the real estate, but they also have the ability to manage it or to lend money to other people.
So that is a good example of, of a mixed, those just get a little bit more complicated in like the reporting of understanding them, you have to trust the manager of the fund anyway. So as long as you're going with a reputable manager, I don't see any problem with doing any of that.
Some of these in just in alternatives and in. General do you have specific type [00:11:00] of tax benefits, I should say? So in talking about the real estate and income ones, I think you could put those together and they're these funds called DSTs, so they're deli. Delaware statutory trusts, and that's, if you, let's say, own a rental for a long time, you have a rental home or a commercial property and you wanted to roll over your capital gains and you didn't want to pay the capital gains taxes when you actually sold it.
You're tired of running the property, you're tired of managing it. You don't even want to have a property manager. And a lot of times it's when people are going into retirement, they want to get out, start to, and not have as much work to doon their portfolio. So they will sell their real estate and they'll roll it into these DSTs.
And there are thousands of DSTs, I don't know if I'm exaggerating with thousands, but there's at least hundreds. There's a lot you can go into. There used to be just a lot of commercial buildings. There's a lot of. Laws around what they can do or not[00:12:00]with these DSTs, so you can't like refinance 'em.
You, like you're buying this building and then you're renting it and then people are making an income from it basically. And so you just would have to explore whether it's right for you. But you could 10 31. Into A DST and that you're buying real estate, right? But then it would be producing the income to you until, whatever, until you pass.
And then you could give that investment to your heirs, which would then have a step up in basis and you would never have to pay the tax. So there's a lot of different strategies that you can do with that too. So with the different categories of the alternatives. So they don't all necessarily just fall into one of these categories.
And to be honest, as time goes on, I might update these categories, but right now I think that's a good way to, to think about it because it's such a huge world and people are used to talking about stocks and bonds, but they're not used to talking about the alternative investments. And I think this is a good way to marry the two so that you.
Can understand what what you're really getting into and [00:13:00] how it can fit into your portfolio because you do not, obviously, again, I'm gonna say, if you only have a three year time horizon, you're not gonna want to get into some, super sketchy thing that is five to seven years and it's got lots of city, permits that it needs to pull. And there's like a lot of stuff that goes into it like that. So you know, you wanna do your due diligence, but I, to me, they fall into these categories and I. Oh, oil and gas would be another one that falls into the income one.
Sorry, I forgot that one.
Tax Strategies and Conclusion
Anyway give me a call or reach out to me if you would like to talk more about all of these different alternative investments. I'm really excited to talk more about them. In future episodes. I'm gonna talk a lot about different tax strategies that you can do with some of these.
And then we also have a lot of episodes that are interviewing the funds themselves and what makes them unique and different. And you'll see that I have a litmus test for some of 'em. And I also have some episodes about some bad ones that I have seen. 'Cause [00:14:00] honestly, I sit at some of these meetings and listen to, it's not very many, but there's few where.
I'm just like, I can't even believe that this is a thing, 'cause there's just so many fees and stuff. So I'm gonna do an episode on the bad ones that I would never invest in also. So anyway I hope you have a great day.
Thank you so much for listening. I really appreciate it. I love doing this podcast, and I will see you soon. Thank you for listening to The Unconventional Investor Podcast. I hope you feel more confident in how you can grow your wealth using the strategies I shared in this episode. If you're ready to take the next step in diversifying your portfolio outside the stock market with alternative investments, head to mefinancial.net/contact-us to book a 15 minute consult call with me.
Let's discuss how we can work together to achieve your financial goals. Until then, I'll see you on the next episode.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.