Alternative investments are often used as a means for portfolio diversification. Individual investors can invest directly in alternative investments or through mutual funds that include alternative assets in their portfolio mix.
While there are different types of alternative investments, there are some investments that are specific to the real estate industry. You will need to understand how an alternative investment fits into your overall financial plan and investment goals before you decide on which option is best for you.
Alternative investments are typically investments in assets that are not considered to be conventional. Conventional investment assets include, stocks, bonds, government bills, money market assets, amongst others. On the other hand, most non-traditional investments such as investments in commodities, real estate, venture capital, hedge funds, etc. involve complex procedures and processes that need high levels of professional knowledge and competence. These types of investments are called alternative investments.
Generally, most alternative investments are only accessible to accredited investors with high net worth. According to the Security Exchange Commissions (SEC), individuals can be classified as accredited investors based on their annual income, net worth and professional experience or knowledge. This would generally include individual Investors with income more than $200,000 for two most recent years and expected to at least remain in this income band for the current year. For organizations, they would need to own assets with total value greater than $5,000,000. This is alongside other requirements that need to be met to qualify as accredited investors than can invest in alternative assets.
Also, due to the complexity of alternative investments and lesser regulations, alternative investments are often held by investors who are knowledgeable about the market dynamics peculiar to their non-conventional nature. For individuals who do not have adequate knowledge on alternative investments, they employ the services of professionals such as financial advisors, investments specialists, accountants and tax experts.
Majority of alternative investments are not registered with the Securities Exchange Commission (SEC) and as such, are not publicly traded on the financial market. This provides a good explanation for why most alternative investments are highly illiquid in nature.
Alternative investments provide different options for investors who want to explore possible returns from non-conventional assets. Some of these options include:
Commodity investments involve buying commodities such as metals –gold, copper, agricultural products or natural gas and oils etc. Most investors invest in commodities directly and/or through commodity Exchange Traded Funds (ETFs) or mutual funds.
Investors through private equity funds can invest in privately held companies for equity in these companies. This is usually with the aim to sell their shares in the company for profit at a later time. Most private equity investments transactions are carried out by investment firms.
These are complex investment vehicles that usually function by pooling cash resources from accredited investors. Hedge funds are managed by registered financial and investment advisors. Hedge fund managers employ calculated investment strategies with the aim to make high returns from the market.
Alternative investments in the real estate market are of different forms and types. The most commonly explored options include real estate investment trusts (REITs), tenancy in common (TICs), Delaware Statutory Trusts (DSTs). Direct purchase investments such as buying properties to flip and sell also qualify as real estate alternative investments.
Other forms of alternative investments include cryptocurrency, foreign exchange (FOREX), private debt funds and financial derivates —such as futures, options and forwards, amongst others.
Commonly known as REITs, Real estate investment trusts can either be publicly traded through the stock exchange market or privately. Publicly listed REITs are usually registered with the Security Exchange Commission.
When you invest in REITs, you generally would purchase shares in a real estate company that owns several properties. These properties can either be retail, commercial or residential. Investments in REITs are done through equity REITs, Mortgage REITs or a combination of equity and mortgage REITs, also known as, hybrid REITs.
Using the REITs vehicle, investors can earn rental income through dividends from their interests in the REIT companies.
Qualified Opportunity Funds (QOFs) are investment vehicles set up for the purpose of investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Funds provides possibilities for real estate investors to become eligible for tax benefits. These potential benefits generally come in three forms:
Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.
Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows investors to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.
Capital gain elimination: Capital gains from qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.
Accredited investors can buy fractional units in institutional quality properties through Delaware Statutory Trusts. A great advantage this potentially provides for investors is that they can defer tax gains on property sale when they make eligible investments in DSTs. This is possible because DST investments qualify as 1031 exchange subject to other requirements being met.
Delaware Statutory Trusts work through the management of the sponsors and trustees or managers who oversee the property investment activities under the trust. You can become a beneficial owner in the trust by purchasing investment interest. These ownership interests in the DST would provide you with distributed income from the trust based on the fraction of your investment in the trust.
There are other forms of real estate alternative investments such as crowdfunding investments. This involves pooling money from many investors to invest in highly valued properties. There is also the tenancy in common (TIC) form of real estate investment that involves the ownership of real estate property by two or more people.
Portfolio diversification: One of the most attractive attributes of alternative investments is the outlet it provides for investors to put their money into assets that are not directly correlated with the common financial markets.
Stock markets and bond markets are inversely related. When the stock prices go up, bond yields decline and vice versa, when the bond market performs outstandingly, the stock market tends to dip. Due to this, investors look for other investment vehicles that do not go through the frequent booms and dooms of conventional financial assets. This is where alternative investments may provide value.
It is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.
Possible returns: When you invest in alternative investments, you do so to take advantage of potential returns. Like every other form of investment, alternative investments can provide possible returns for investors. However, returns are not guaranteed.
Lack of volatility: Alternative investment options may not be as volatile as traditional investments. The prices and values of alternative assets typically do not fluctuate easily as other conventional asset prices.
Tax Benefits: Some alternative forms of investing provide investors with the possibility of deferring tax and other tax benefits. One of such alternative investment vehicles in the Delaware Statutory Trust which allows investors to defer capital gains for transactions that qualify as 1031 like-kind exchange.
Alternative investments are not all rosy, they have associated downsides to them. The cons of investing through alternative investments should be considered carefully before delving into the complex world of this non-traditional space of seeking possible returns.
Accessibility: Most people are not aware of the fact that a significant aspect of alternative investments is that they are not easily accessible to the large public. There are often restrictions on eligibility for alternative investments. This is partly due to the complexity of these investments and the widely unregulated market for these assets.
Also, most alternative investments require significantly higher financial commitments, usually in the minimums of $25,000 to $100,000. This automatically limits access to only investors who possess such amounts of money to invest.
Illiquidity: When investors want to buy conventional assets such as stocks or bonds, they can easily purchase them from the public financial markets through brokers or other investment platforms. This is not the case for alternative investments. Investing in alternative assets generally involve private dealings and contracts. Most alternative investments are not publicly listed, making them highly illiquid investments. When purchased, these assets may not be easily sold or disposed of as quickly as conventional assets.
High Risk: Alternative investments are relatively riskier forms of investments. This is due to many reasons. One of such reasons is as a result of the unregulated nature of alternative investments. The SEC does not regulate most alternative investments and as such, this can lead to inadequate disclosure practises and asymmetric Information about many aspects of these investments.
Also, although there may be less frequent swings in alternative markets, occasional swings may be larger. Returns on alternative assets may be relatively higher, but also, any losses may have significantly more financial impact.
Stax Capital offers different real estate alternative investment options. Contact the team to discuss which available investment options are best suitable for your needs.
This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments. Also note that in assessing investment returns, past performances are not indicative of future performance.
There is no doubt that investing in real estate can be complex, but there are many misconceptions about real estate investments. Whether you are a new or potential real estate investor, or you have been in the game for quite a while, you probably have heard or come across certain misconceptions about investing in the real estate market.
Some of these misconceptions have been on for so long and unfortunately, many people believe them without carrying out adequate research to get the right information about property and real estate investments.
This article would review some of the misconceptions about investing in real estate and provide some information on what you need to know.
Firstly, expensive is relative and while there are real estate investments that require significantly huge sums of cash, there are also affordable means through which investors can partake of the potential benefits of real estate investments for a fraction of the cost. Secondly, the costs involved in real estate investments depend largely on the investment strategy and platform you use.
Also, there may be sources of funding such as bank loans through which individuals can get cash to invest in real estate. A simple example is, as a real estate investor who wants to purchase property directly in the market, you can do so by obtaining a loan from financial institutions.
Well, this may be true to an extent, depending on the type of investment. The reality is real estate investments are never really passive as there needs to be some sort of continuous management and maintenance of investment properties. A real estate investment may be considered a source of passive income when the burden of managing the properties or any tenant relationship is passed across to a third party.
For example, when you invest in alternative real estate investments such as Delaware Statutory Trusts (DSTs) or Real Estate Investment Trusts (REITs), although you may be at the passive end of things, managers of these investment vehicles are very active in the backend to ensure quality property investments are made and maintained.
A basic concept behind any form of investing, whether in conventional financial instruments such as stocks or bonds, or alternative assets, is the possibility of returns. However, investing to make returns is also accompanied with underlying risks. Some of these risks include market risks — losing asset value due to fluctuations in market prices, economic risks — such as the real value of returns being eroded due to inflation.
The real estate market is not excluded from these possible risks. Property assets are relatively illiquid, meaning they may be more difficult to sell off to another party as quickly as you may want.
Most real estate investments are considered alternative forms of investments, they are generally not regulated and therefore considered to be risky. However, as it is with other types of investments, you need to be well informed about the different options of investing in real estate. Make sure to engage subject matters and experts such as accountants and financial advisors before taking any calculated risks with real estate investments.
With real estate investments, cheaper doesn't always mean better. While getting good deals is something to look forward to, cheaper properties may lead to even more expenses in the long run. One of the possible ways to make returns from real estate investments is through the sale of property at an appreciated value leading to capital gains. Cheaper properties in certain locations may not appreciate, especially at the pace that you would expect and prefer.
Likewise, when investing in real estate, a more expensive property does not automatically lead to higher gains and profit. A more affluent region may appreciate even slower than a suburban property location in the long run. Investing in real estate is not always black and white. Asides purchase price and location, a lot of other factors impact the overall performance of real estate investments.
Most real estate investments are illiquid, but you can also hold some real estate investments for short-term periods. One of the things you need to consider before you choose a specific real estate investment method is your investment objective. Some investors are in it for long term periods of up to ten years. Others may want to hold their investments for only about three to five years. Determining what your investment expectations and objectives are ahead of time would help you choose the best strategies.
Are there possibilities of making returns in real estate investments? Yes. However, there is no guarantee. For real estate investments that perform relatively well, a lot of work goes into research, due diligence, property selection and management.
When real estate investments involve pooling resources to partake in institutional quality properties for fraction of the costs, the sponsors and managers of such investment vehicles engage a lot of expertise and professionalism to ensure that they employ top-notch management practises to make good property selections as well as tenant selections.
Investing in real estate can lead to potential profit but it requires a lot of work and effort. This is why investment partners charge investment fees, to support the ongoing background work that has been passed on to them. Also, an important aspect to note is that past performances of investment vehicles do not guarantee future performances.
Capital gains and dividends as well as rental income are ways in which you can make returns from investing in real estate. However, there are other benefits that you can access through certain real estate investments. For example, through investing in Delaware Statutory Trusts as replacement property, you can qualify for the 1031 exchange tax deferral benefits, provided all requirements are met.
As a real estate investor, when you invest in Qualified Opportunity Zone Funds, you may be eligible for a capital gain deferral, a capital gain reduction or even an entire capital gain elimination when eligible investments in a Qualified Opportunity Fund are held for at least 10 years.
There is also the benefit of diversifying your portfolio through investing in real estate. Generally, real estate investments are not directly impacted by the market swings in stock markets and bond markets. This may provide a good means for investment diversification to serve as a cushion for potential losses in other investment assets. However, it is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.
Carry out extensive research to ensure that you have the adequate information you need about the different types and kinds of real estate investments. When you are more informed, you are likely to make better investment decisions. Research can be in the form of using the internet to get reviews and ratings, you can also obtain information about investing in real estate from potential investment partners. Information about publicly listed real estate assets can also be very useful.
Investing in real estate requires huge capital and financial commitment, as such, it is recommended to make research an important part of the process. Plan properly and ensure you get objective insights.
Investing in real estate can be complex. There are usually many aspects to the whole investing process. For example, real estate investments require that you sign off on contracts, a lawyer may need to be engaged to the review terms and conditions of any purchase or investment agreements. Also, there may be some tax implications involved in purchasing or selling a real estate property. In this case, an accountant would be in the best position to provide expert advice on how this would impact current and future tax situations. Tax experts can also help you analyze your investment transactions to identify areas for potential tax benefits and advantages.
To a very large extent, the investment partners you engage would determine your experience in the entire process when investing in real estate. While the investment partners cannot guarantee the returns you would get from your investments, their expertise and professionalism can impact the investment process. Real estate investment partners with more experience and professional knowledge can provide better insight, carry out better due diligence and invest in higher quality real estate properties on your behalf.
Stax Capital is a trusted investment partner. We are an experienced team that engages professional due diligence and expertise in making sure your investment goals are achieved. Contact the team for any questions on investments through real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs.
This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments.
If you are searching for alternative channels for real estate investing, Direct Participation Programs (DPPs) may be an effective approach to investment diversification. DPPs for property investors are often in institutional quality investments and provide a means to explore possible benefits of a market that is not directly correlated to traditional investment assets.
Direct Participation Programs for real estate investors are usually operated in a structured manner and may entail complex requirements. There are inherent possible benefits as well as risks associated with DPPs. Interested in Direct Participation Programs and how they may be beneficial for your portfolio? Here’s what you need to know.
A Direct Participation Program, sometimes referred to as a direct participation plan, is an entity that operates with a pooled structure, offering investors access to possible business cash flow and tax benefits. The pooled nature of direct participation programs affords investors access to institutional quality properties when they purchase fractional units in a typical program.
The different types of DPPs could include: investment or asset focus, investment entities or registered vs. unregistered DPPs such as in private placements.
Direct Participation Programs are alternative investments that are not directly impacted by the market volatility of traditional investments in the stock market or bond market. They therefore offer an option for investment diversification.
DPP entities are generally operations in oil and gas assets, equipment leasing projects, energy, commodities, business development companies (BDCs) and real estate. The most common types of DPPs are real estate businesses which offer investors the opportunity to own real estate ownership interest in a passive form.
Real estate DPPs are more commonly operated as non-traded Real Estate Investment Trusts (non-traded REITs). The real estate direct participation programs could include investment in affordable housing, development properties, operating properties, land development or mortgage programs.
DPPs generally operate as pass entities in the form of limited partnership, a subchapter S corporation, Limited Liability Corporation (LCC) or a general partnership. Real estate DPPs widely operate in the limited partnership form or Limited liability corporations. What this means for investors is that they have limited liability as regards the operations of the DPP. This limits their losses and liabilities to only their ownership interest in the direct participation program.
As limited partners, investors are not involved in the general management and operations of the DPP. The management of a direct participation program is handled by the general partner or sponsor who oversees the operations and business investments of the program. In some forms of operations, limited liability partners are able to vote in favour of the general partners or vote them out of management.
DPPs usually have no tax liability on a corporate level. A direct participation program’s operational structure enables it to transfer income, losses or capital gains to participation partners and investors on a pre-tax basis.
A binding document such as an investment agreement directs the responsibilities of all parties involved in the direct participation program. The investment agreement generally outlines items such as contribution obligations, allocation of income, loss or capital gain, cash distribution, rights and obligations of sponsors, general partners and limited partners. Some DPP agreements may allow for transfer of ownership interest.
DPPs are relatively illiquid, they do not have a direct market and thus cannot be traded publicly. The pricing of units in a DPP are usually not as transparent as publicly traded financial instruments such as equities. Operational requirements may differ across DPP entities but usually, this type of investment is only accessible to investors who meet certain income and net worth status. Also, due to its illiquid structure, as an investor with interest in a DPP, you would expect to receive possible income in a relatively long term period, from about five to ten years.
Here are the potential benefits you can tap into as a real estate investor with a Direct Participation Program.
Portfolio Diversification: Direct participation programs can be utilized for portfolio diversification strategies. Investors looking to buy into alternative investments asides their holdings in stocks, bonds, Exchange Traded Funds (ETFs) or mutual funds can diversify with DPP investments.Property DPPs allow for diversification in the real estate market.
Potential Income: Asides diversifying your investment portfolio, investments in a DPP is also driven by the potential income and profits that can be earned through the real estate market and possible property capital gains. Investment properties have the potential for appreciation especially in development properties or land development.
Passive cash flow: The business structure of direct participation programs allows the investors who are limited liability partners to earn passive income. They are usually not involved with the management of the business. The general partner (s) are in charge of running the business operations.
Possible Tax Advantage: An investment in a DPP may provide opportunities for tax deductions and credits especially in the case of losses passed through to the limited liability investor. This tax deduction can be claimed on the taxable income for the year in which you file your taxes. There could also be possibilities of partial deferred cash flow for investments in DPPs.
Institutional Quality Investment: If you have always wanted to participate in real estate investment for high end, institutional quality properties but haven’t been able to do so due to the substantial high costs, DPPs provide a solution for you. With fractional investment value as low as $25,000, you can own interest in institutional quality investments through a direct participation program. The pooled investment form of operations provides access to high valued properties that would have been out of reach.
Limited Liability: Investors in DPPs have limited liability legal status. The losses incurred is capped at their investment principal amount.
Direct Participation Programs come with certain cons and risks. Given its mode of operations these are the possible setbacks of real estate investments through DPPs.
Illiquidity: The illiquid nature of direct participation programs is perhaps the most common downside to some investors. Investments in DPPs need to be held for the long term. If you are looking for investments that can be readily sold off within a short period or one to three years, in a public or private market, a DPP may not be the best option.
Accessibility: Due to its complex structure and operations, DPPs are usually only made accessible to accredited investors. Asin alternative investments like a Delaware Statutory Trust (DST), accredited investors are classified based on their annual income, net worth, asset value and/or professional investment knowledge.
Economic Risks: Although real estate DPPs are not directly impacted by the traditional stock or mutual funds market, it can experience losses due to changes in economic factors that negatively affect the real estate market.
Performance risk: As it is with any other investment type, there is no guarantee of consistent income or gains from an investment in direct participation programs. Real estate properties may experience vacancy issues or even devaluations in extreme cases.
Complexity: As an investor, if you decide to include DPPs as part of your investment portfolio, you would need the expertise of financial advisors to simplify the complex nature and implications such alternative investments
Transparency: Due to its structure of operations, non-traded DPPs are not listed on the public stock market and hence there is no much public information about price and performance except what is provided by the general managers of the DPP. This risk of non-disclosure can be managed by carrying out thorough research on a DPP’s historical performance, management practices, mode of operation and quality of real estate properties.
Investment in real estate through a direct participation program may provide you with investment diversification benefits and the ability to invest is a different class of asset that is not correlated to the traditional financial markets.
However, you need to ensure that this type of investment suits your overall investment strategies and that the associated risks are considered before delving into DPPs. Partnerships in DPPs run for the long term and thus investors can not readily pull out any gained income in the short run. Also, considering the illiquidity of direct participation programs, you should determine if the possibility of not readily finding a means to sell off your interest in a DPP is an acceptable risk for your portfolio management.
Financial advisors and tax experts are best suitable to provide you with advice on how to incorporate DPP investments into your portfolio as they can provide clarity on tax implications as well as the possible related benefits and risks.
Looking to diversify your investment portfolio and want to consider investment units in a Direct Participation Program that provides you access to institutional quality properties while effectively managing your investments? Please contact the Stax Capital team for more information.
We are a team of highly professional experts and are always available to guide you through the process of investing through a real estate direct participation program.
This website is for informational purposes only. This website does not provide investment advice or recommendations, nor is it an offer or solicitation of any kind to buy or sell any investment products. Securities offered through Stax Capital, Member FINRA & SIPC. Stax Capital is located at 7960 Entrada Lazanja, San Diego, CA 92127. Contact us toll free at 844-427-1031. Private Placements and Direct Participation Programs are speculative investments and involve a high degree of risk. An investor could lose all or a substantial portion of his/her investment. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment in Private Placements and Direct Participation Programs. Private Placements and Direct Participation Program offering materials are not reviewed or approved by federal or state regulators. Investors should not place undue reliance on hypothetical or pro forma performance summaries. Investors must conduct their own due diligence and should rely on the advice of their own financial, tax and legal advisors prior to making any investment decisions.
The contents of this website are neither an offer to sell nor a solicitation of an offer to buy any security which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment. Neither Stax Capital nor any of its representatives provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision. Pursuant to SEC rule 501 of Regulation D, prior to engaging in substantive discussions regarding DST specific investments, investors must first be qualified as an accredited investor, by way of meeting certain income or net worth requirements.
Past performance is not an indication of future returns.
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of Stax Capital or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
There are substantial risks in the DST Investment program. This type of investment is speculative, is illiquid, and carries a high degree of risk – including the potential loss of the entire investment. See the “risk factors” in the Private Placement Memorandum for a complete discussion of the risks relevant to DST offerings. Investors have no control over management of the Trust or the property. There is no guarantee that investors will receive any return. Distributions may be derived from sources other than earnings. The property will be subject to a Master Lease with an Affiliate of the Sponsor. The property will be subject to the risks generally associated with the acquisition, ownership and operation of real estate including, without limitation, environmental concerns, competition, occupancy, easements and restrictions and other real estate related risks. The properties may be leveraged. The Manager, the Master Tenant and their Affiliates will receive substantial compensation in connection with the Offering and in connection with the ongoing management and operation of the property. The Manager, the Trust, the Master Tenant and their Affiliates will be subject to certain conflicts of interest. An investment in the Interests involves certain tax risks.