Quick, name three ways to invest in real estate.
You probably jumped straight to real estate investment trusts (REITs), long-term rental properties purchased through a company like Roofstock, and short-term house flipping. These are all reasonable strategies, and ones that I’ve used myself over the years.
But just because they’re the most popular options, that doesn’t mean they’re the only — or even the most profitable — ways to invest in real estate. In fact, lesser-known niches often offer better returns in any market or asset class. Business gurus call these “blue oceans” (meaning there’s less blood in the water from competition) and spout pithy catchphrases like “the riches are in the niches.”
Best Alternative Real Estate Investment Options
If you’re intrigued by real estate but want to explore bluer waters, take a closer look at these lesser-known real estate investing strategies. Conventional is boring, anyway.
And keep in mind that the real estate industry’s state of play is constantly changing. In just the past few years, we’ve seen an explosion of digital real estate investing platforms that don’t neatly fit into any of these categories.
Some, like RealtyMogul, function a lot like public REITs, offering access to diverse and often fast-growing commercial real estate portfolios.
Others, like Concreit, are more flexible and user-friendly than typical real estate investments. Concreit allows members to auto-invest at regular intervals and withdraw funds with just a week’s notice in normal circumstances.
Bottom line: Even as you investigate these potentially lucrative alternatives to traditional real estate investing, keep one eye on emerging trends in the space. Chances are, you won’t have to wait very long for the next opportunity.
1. Coworking Spaces
With coworking spaces skyrocketing in popularity, it’s hard to believe that the industry is little more than 10 years old.
The first coworking space in the world debuted in San Francisco in 2005, and over the next few years, more and more spaces popped up in expensive cities like London and New York. A small trade group opened and held the first industry conference in 2009, The Global Coworking Unconference Conference.
The industry has accelerated ever since, from being a fringe movement among solopreneurs and freelancers to becoming one of the largest trends of the decade in commercial real estate. The industry doubled from 2015 to 2018, and analysts forecast over 1 million members in the United States alone by 2022, according to trade group Coworking Resources. Property consultancy company JLL reports that flexible office space has grown faster than any other segment of the industry at an average of 23% per year since 2010.
Coworking spaces are a win-win for everyone involved. Members can share office costs, even if they’re individual freelancers just looking for a place to prop their laptops. Startups can add or subtract office space flexibly. Office space providers can rent out more desks than they actually have since not all desks will be occupied all the time.
Curiously, the fastest-growing customer base for coworking spaces has shifted away from freelancers and startups. According to multinational coworking giant WeWork, as reported by Curbed, corporations have led the surge in sign-ups over the last few years.
How to Invest in Coworking Spaces
The easiest way to invest in coworking spaces is by investing in REITs that include them. Examples include Boston Properties (BXP) and Washington REIT (WRE). These can be purchased through most investment accounts like J.P. Morgan Investing.
Or you could take a more hands-on approach. If you currently own or lease office space, but don’t use all of it, why not rent it out? You certainly wouldn’t be alone. Nearly two-thirds of all coworking spaces in the United States are side businesses for their owners, per trade publication Deskmag.
Alternatively, you could swing for the fences and launch your own dedicated coworking space. The business plan is hardly elaborate: You rent office space and then sublease it by the office, desk, or shared-access lounge.
As a small business owner, I work from a coworking space myself, and I love it. For under $100 a month, I get 24/7 access to upscale office space, views overlooking beaches and mangrove forest, and unlimited coffee and tea.
The working world is changing. A CNBC study found that 70% of office workers worldwide telecommutde at least one day per week in 2018. In the coronavirus pandemic of 2020, fully 62% of all employees in the U.S. worked remotely, doubling the previous figure, according to Gallup. While some will return to a physical office, many won’t, and not every remote worker wants to work from their living room.
2. Raw Land
Investing in raw land comes with plenty of perks, not all of them obvious.
First, it’s far more hands-off than residential or commercial real estate. No midnight phone calls from tenants complaining that a light bulb burnt out; no repairs or maintenance calls.
It also costs next to nothing to maintain. If you buy raw land in cash, your only ongoing cost is property taxes – which are often low for raw land because of the relatively cheap price tag.
Competition for land investing proves virtually nonexistent in many areas. When you approach an owner about buying undeveloped land, in some cases, you’re the first person ever to do so. Owners of raw land earn no income from it, so they often accept pennies on the dollar.
Raw land is also virtually unregulated, unlike residential rental properties, which endure immense regulation. If you don’t think regulation matters to real estate investors, look no further than the eviction moratoriums of 2020 that left many landlords strapped with hefty mortgage payments but no rental income and no way to replace nonpaying tenants with paying ones.
How to Invest in Raw Land
Land investors have several strategies at their disposal. The first is to do nothing. You can buy and hold the land and wait to sell it until after it’s appreciated.
You can also flip land if you buy it below market pricing. One land investor I know buys land at a discount, then offers seller financing to buyers. He sells the land at a premium and charges extremely high interest rates because he can. Land loans are not regulated like mortgages and are difficult for buyers to borrow, so many buyers are willing to pay high interest rates. And if they default, the foreclosure process is faster than for residential homes.
Alternatively, you can improve the land in some way. One option is to go through the entitlement process, having the property rezoned, possibly installing water and sewer lines, subdividing it, or a combination of these. You could then sell the land as closer to being “buildable,” or you could build on it yourself as a developer. If you choose the latter, you can then either hold the property as a long-term rental or sell it upon completion.
Of course, no one says you have to build anything to improve the land. You could cultivate the land for agricultural or some other non-development use and either hold or sell it.
Most would-be real estate investors avoid land investing because they don’t understand it. But with basic training and education, buyers can quickly learn how to evaluate and invest in raw land, along with the pitfalls to avoid. Be particularly careful with zoning; it’s not always possible to rezone land, and many municipalities impose zoning restrictions.
3. Manufactured Homes
Like raw land, many people avoid mobile and manufactured homes because they’re not sexy. They’re so unsexy, in fact, that some investors look down their nose at the very idea. This suits manufactured home investors just fine; they get to laugh all the way to the bank.
It’s worth pausing to mention that there is a technical difference between manufactured homes and mobile homes. In June 1976, the Department of Housing and Urban Development started regulating mobile homes, which had previously been largely unregulated. Factory-built homes constructed after 1976, which are subject to building codes, are referred to as “manufactured homes,” while “mobile homes” refer to unregulated movable structures built before 1976. With that said, most people still use the terms interchangeably.
Manufactured homes can either be permanently attached to the land they sit on, or they can sit in parks. Mobile home parks typically charge a monthly rental fee for the lot, which often includes water, sewer, and trash service. When you buy a manufactured home in a park, you almost always buy the home only, not the land (more on mobile home park investing shortly).
How to Invest in Manufactured Homes
The most common investment strategy for manufactured homes is buy and hold. An investor buys the home, either with the land or the home only if it’s in a park, and signs a long-term lease with a renter.
As with traditional rental properties, there are larger and smaller manufactured homes, in all conditions, with a wide range of finishes and fixtures. Some are lovely modern homes with beautiful amenities; others are hovels.
Parks also vary considerably in quality, and while investors can always move the home, it’s not a trivial process; it can cost more than the home itself to move it. Also, some parks impose age restrictions, such as 55 years and older, so do your homework on the park, and not just the home, before buying.
4. Mobile Home Parks
Instead of buying an individual mobile or manufactured home, you can buy entire mobile home parks. In doing so, you buy both the land and the park business. You charge a monthly lot fee, which may include some utilities. If a tenant fails to pay rent, you file for eviction as you would with any other rental business.
Like buying manufactured homes, many real estate investors find buying mobile home park an unsexy business and ignore it. This creates an opportunity for investors who don’t mind owning assets as diverse as mobile home parks.
One perk of investing in mobile home parks is that you don’t have to maintain the homes themselves because you don’t own them. All you need to do is maintain is the common areas and grounds and keep the water and sewer running. That makes for low overhead and expenses and high profit margins.
Turnover rates also tend to be lower in mobile home parks than in other rental properties because it costs so much money to move a manufactured home. When someone buys a mobile home, they’re a homeowner, and they typically stay put. Turnovers are where most of the work, and most of the expenses, lie for the typical landlord, so a lower turnover rate is an enormous benefit.
How to Invest in Mobile Home Parks
Like most things in life, you can buy mobile home parks online. The most popular website for buying and selling parks is Mobile Home Park Store, which features several hundred parks listed for sale at any given time. You can also buy mobile home parks on commercial real estate giant LoopNet. Sometimes, you can also find parks for auction on Auction.com or eBay. Do thorough due diligence before shelling out any money, especially through a peer-to-peer selling service such as eBay. Always use a disinterested third-party title company to verify and transfer title.
Of course, many real estate investors don’t limit themselves to what’s publicly listed. Intrepid investors utilize direct mail, cold calling, or even in-person visits.
Mobile home parks can generate an enormous amount of revenue, which means they’re often expensive. Be prepared to pay seven figures for a park in a desirable location with substantial revenue.
As a final note, mobile home parks offer additional revenue opportunities to savvy entrepreneurs. Park owners can install laundromats, mini-marts, or other on-site services to generate additional cash flow from their parks.
5. Real Estate Crowdfunding Websites
A recent addition to the catalog of real estate investing options, crowdfunding websites often offer strong returns to investors. They also allow for easy diversification across many real estate markets and property types, from residential to office space, retail to industrial and beyond.
Different real estate crowdfunding websites follow different investing models. Some have a single pooled fund, or several large pooled funds, which pay all investors the same return. The fund buys, updates, manages, and sometimes sells properties using funds raised from the public. It’s much like investing in an REIT, except it’s less regulated by the SEC and isn’t required to pay out 90% of net profits in dividends.
Alternatively, some real estate crowdfunding websites let investors fund the purchase of specific properties. The higher the risk of the borrower, property, or both, the higher the offered return. But there’s a pleasing transparency to this crowdfunding structure, even if investors don’t actually have any additional control over the property’s renovation or management.
One other important distinction from REITs is the lack of liquidity. Because REITs are publicly traded, investors can buy and sell them instantaneously. But crowdfunded debt is not publicly traded, and when you invest, you do so for at least a minimum investment period – usually at least six or 12 months.
How to Invest in Real Estate Crowdfunding Websites
An opening word of caution: Most real estate crowdfunding investment opportunities only accept funds from accredited investors. If you don’t know what an accredited investor is, then you probably aren’t one. These are wealthy investors with a net worth of over $1 million or an annual income of over $200,000 ($300,000 for married couples).
With that said, there are a handful of real estate crowdfunding websites that specialize in working with non-accredited investors. Two crowdfunding websites that invest directly in real estate through a fund are Fundrise and Streitwise. Fundrise accepts a minimum investment of only $500 and pays returns ranging from 8.7% to 12.4%. RealtyMogul requires at least $1,000 and has paid around 8% in monthly distributions since its inception.
To invest in specific real estate projects as a non-accredited investor, check out Groundfloor. You can invest with as little as $10 and earn returns ranging from 5% to 25%, depending on the property and borrower. These loans typically range from six to 12 months, making the commitment relatively short.
Alternatively, you could invest in farmland through AcreTrader. Farmland is quickly becoming a popular investment because since 1990 it’s never had a negative yearly return. In fact, if you would’ve invested $10,000 into farmland in 1990, it would be worth nearly $200,000 today.
As always, do your homework before investing money with a crowdfunding website. Ask about default rates, and pay particular attention to the time commitment for funds.
6. Private Notes
A note is a legal document declaring a loan from one party to another. When you borrow a mortgage, for example, one of the documents you sign at settlement is a note. Many real estate investors fund their deals by borrowing money from individuals, rather than banks. They sign a private note with an individual investor, borrowing money at whatever interest rate and other loan terms both parties agree to.
I invest money in private notes. For instance, there’s a couple in Ohio who retired before turning 30 thanks to their rental property income, though they haven’t stopped buying new properties to build even more passive income streams. I currently have $10,000 invested with them at 10% interest, and we’ve both been happy with the arrangement. They have flexible funding from individuals, and their investors – including me – earn a strong, reliable return.
Still, it’s not without risk. If the borrowers default on my loan, my only recourse is taking them to court, winning a judgment, and then trying to collect on that judgment.
How to Invest in Private Notes
Unlike most of the options on this list, private notes operate primarily on trust. You invest money with someone you know personally who has demonstrated a clear and impressive track record of success with their real estate investments – in other words, someone you trust wholeheartedly to pay you back.
If you don’t know any real estate investors, start immersing yourself in the industry. Join a local real estate investing club and attend every meeting for several months in a row. Network with local turnkey sellers, wholesalers, and real estate agents who specialize in working with investors. Immerse yourself in the local real estate investing community. It should quickly become clear who has been around the block for a while and has an established track record of successful investing. Get to know those people better. As you build a relationship with them, you can discuss opportunities to invest money with them, as a lender or even as a partner.
Alternatively, you can buy private notes online through websites like Note Investor. Just be careful to vet all borrowers thoroughly before handing over your hard-earned cash.
7. Real Estate Syndications
In a real estate syndication, an “operator” or “sponsor” serves as the lead real estate investor and looks for silent partners to invest money. These silent partners are known as “members” or “limited partners.” Unlike with a crowdfunding website or private note, these limited partners are not simply lending money; they become true partners with a fractional share of the ownership.
Imagine that Odelia finds an apartment building she wants to buy for $2 million. She has $500,000 of her own money to invest and decides to raise the other $1.5 million through a real estate syndication. As the operator, Odelia lets you know about the deal. You know she’s experienced in these sorts of investment projects, so you put up $100,000, and Odelia raises the rest of the money from a handful of other investors.
Because you put up 5% of the money, that buys you a 5% ownership stake in the apartment building. This ownership offers greater protection for your investment. And because you’re an actual owner, not just a lender, you get all the tax benefits afforded to real estate investors, including above-the-line deductions, depreciation, the 20% pass-through deduction, and the ability to defer taxes on capital gains with a 1031 exchange.
How to Invest in Real Estate Syndications
Typically, only accredited investors can invest in real estate syndications. If you’re an accredited investor, you can gain access to these exclusive, larger-scale real estate investment projects by getting to know local investors who specialize in them. Who invests in apartment buildings in your area? In commercial high-rises? Look for non-corporate buyers of commercial real estate and network with them. While they may or may not attend the local real estate investing club meetings, other investors there can tell you who operates in that local niche.
Before investing money, make sure you understand the terms of the deal. Most real estate syndication projects are long-term commitments, where investors can’t simply sell out when they feel like it.
Some of the alternative investments above are easier to buy into than others. Most require either specific knowledge, a specific network, accredited investor status, or a combination of the three. But for those willing to invest some time in learning from or networking with real estate investors, the returns can prove greater than average securities.
The two easiest alternative real estate investments above are crowdfunding websites and REITs that invest in coworking spaces. Consider starting there, and if you like what you find, keep expanding your knowledge of the wide world of alternative real estate investments.
What alternative real estate investments are you most interested in? Why?