Holding stocks, bonds, and cash is a good start to saving and investing, but savvy investors are exploring alternative investments to diversify their portfolios, hedge their bets, and generate higher returns than traditional investments.
What are the best alternative investments? Well, it depends on your financial goals. Are you looking for short-term investments or long-term? Are you looking for a profitable sale or for recurring income?
In this article, you’ll find 15 of the best alternative investments to consider in 2023.
- Precious Metals
- Real Estate
- Real Estate-Based Securities
- Digital Assets
- Business Venture Crowdfunding
- Hard Money Loans
- Peer-to-Peer Lending
- Hedge Funds
- Futures and Options
- Equipment Leasing
- Tax Liens
Collectibles are a perennial favorite type of alternative investment because they are often as much about passion for the items as they are about return potential. You can invest in any type of collectible, including
● Fine art,
● Rare coins,
● Toys, and
Returns vary dramatically, not just between categories of collectibles, but between individual items within a collection. Some bottles of wine are worth thousands, while others are worth only a few dollars. Collectibles are also known for being finicky; past value provides little-to-no insight into future values.
2. Precious Metals
Precious metals, like gold, copper, and silver, are desirable and scarce. They tend to hold their value over time, making them a low-risk investment. Being low-risk, precious metals often come with comparatively low returns. They perform best when market conditions are uncertain, and investors prefer a reliable asset over the ups and downs of the stock market.
Commodities are tangible assets with substantial fungibility (meaning that one unit of the asset is basically the same as any other unit of the asset, regardless of producer or branding). Grains, produce, and oil are examples of commodities. Commodities are generally in high demand, regardless of market conditions, so they remain a stable investment in uncertain economic times.
4. Real Estate
Real estate is one of the most diverse asset classes available. There are many ways to invest in real estate, including
● Buy-and-hold rental properties: single-family homes purchased with the intention of renting them out over the long term.
● Fix-and-flips: short-term renovation projects in which you buy a fixer-upper, rehab the property, and sell for a profit.
● Multi-family developments: building a multi-family structure from the ground up to either sell or rent out.
● Commercial property: leasing out retail, office, or industrial spaces to companies.
Real estate is among the most reliable investment types available. But some investors have a hard time accessing these investments because the upfront costs are too high or because there is too much legwork required to choose the right property. Real estate syndication offers the solution to both of these issues. Syndication is similar to crowdfunding, in that multiple investors join funds to finance projects that would be too expensive to front alone. A syndication company then professionally manages the project, handling every detail from securing the property to overseeing construction and disbursing passive income back to investors. The syndication investment model is designed to minimize risk while maximizing reward.
5. Real Estate-Based Securities
It is possible to invest in real estate without buying property. There are several financial securities available to investors who want to share in the rewards of the real estate market without being responsible for owning tangible property. Your options include
- Real Estate Investment Trusts (REITs): REITs are companies that invest in income-generating properties, then share the profits with investors in the form of dividends.
- Real estate-based mutual funds: Mutual funds are actively managed bundles of stocks or bonds. You can buy and sell shares in a mutual fund similarly to buying and selling stocks in individual companies.
- Real estate-based ETFs (Exchange-Traded Funds): ETFs are very similar to mutual funds, but instead of being actively managed, they passively follow a set market index (like the S&P 500, for example).
The main benefit of real estate-based securities is that they don’t require any ongoing management on your part.
Cryptocurrencies are high-risk alternative investments, with the potential for high rewards (or complete losses). Bitcoin is the most well-known cryptocurrency, with Ethereum coming in a distant second.
In the crypto vs real estate debate, real estate wins as being a sound method of building wealth over time. But few, if any, investments have seen returns like a hot crypto market. From January 2020 until January 2022, for example, the annualized return for Bitcoin was an unbelievable 256%. Just know that the return for January 2022 through December 2022 was negative 65%.
You should also be warned that it is possible to lose your crypto investment if someone hacks your digital wallet, or if you simply lose your access key to your digital wallet. As a general rule, you should only invest what you can afford to lose in cryptocurrency.
7. Digital Assets
Digital assets are non-tangible assets that exist only as computer codes. They could be any of the following:
● Graphic designs
● NFTs (Non-Fungible Tokens)
● Plug-ins and add-ons
Because this is such a broad category, the returns vary widely. Art-based NFTs notoriously tanked in the late spring of 2022, but there is still value to be had in utility-based NFTs (those that offer real-world benefits like access to content or events). And the financial success of many of the other items in this category simply depends on how well they meet the needs of an engaged marketplace. Do your research before investing in this asset class.
8. Business Venture Crowdfunding
While you can invest in publicly-traded companies by buying stock, you can also invest in private companies via alternative investment platforms. Business venture crowdfunding allows investors to provide cash to the company in exchange for equity in the company.
In most cases, business crowdfunding is specifically for start-up companies that need seed money. By getting in on the ground floor of a new business, you could potentially earn a strong return. But if the company fails to turn a profit, you could potentially lose your investment.
There are multiple crowdfunding platforms available, so invest some time in comparing your options.
9. Hard Money Loans
Hard money loans are direct personal loans from one individual to another. Perhaps you have a colleague who needs financing for a fix-and-flip or a small business idea, but they don’t qualify for a traditional loan. You can lend them the cash at an agreed-upon interest rate, which is typically on the high end since the borrower doesn’t qualify for a bank-issued loan.
Hard money loans can be risky. After all, there’s a reason the borrower is resorting to a hard money loan rather than a bank loan. Perhaps they have credit issues, or they are carrying too much debt for a bank’s liking. The payoff could be substantial interest income, but the potential downside is that they default on your loan, and you lose your investment.
10. Peer-to-Peer Lending
Peer-to-peer lending is similar to hard money loans, but instead of extending a personal loan directly to the borrower, you pool your funds with other investors to extend loans to a pool of borrowers. This is typically done through an online platform that matches investors with borrowers.
The benefit of peer-to-peer lending is that you’re lending to multiple borrowers, so if one borrower defaults, your portfolio can still be saved by the other borrowers repaying their loans. The downside is that you don’t have as much control as you would with hard money loans.
11. Hedge Funds
Investing in hedge funds is among the most popular high-net-worth investing strategies, year after year. Hedge funds are bundles of investment (often focused on stocks or foreign currencies) that a professional hedge fund manager actively manages. The manager decides which investments to include in the fund, so your investment is only as good as your hedge fund manager.
Many hedge funds are only available to accredited investors, so if you don’t have the income or assets to qualify as an accredited investor, you should consider another option from this list.
12. Futures and Options
Futures and options are known as derivative contracts because they derive their value from movements in specific markets (like a certain market index or commodity). With futures, you agree to purchase a specific asset at a future date for a set price. If the price of that asset goes up over the agreed-upon value, you get a deal, but if the value falls, you’re stuck paying the higher rate. With options, you have the right, but not the legal obligation, to purchase an asset at a set price at any point during the contract period.
These complex investments are best suited to investors who enjoy a hands-on approach to research and management over their portfolios. In many cases, physical commodities are the subject of futures and options contracts, so you may need to be able to accept and store large quantities of whatever asset you agree to buy. And then have a plan for selling off that inventory.
13. Equipment Leasing
Because specialty equipment is so expensive, and it doesn’t appreciate in value, many businesses opt to lease rather than buy. Investors can invest in farming, construction, or manufacturing equipment individually or through an investment platform. In most cases, the returns are higher when investing through a platform because the platform can purchase the equipment at lower bulk rate prices. The platform would determine which equipment to buy with your investment dollars, find lessees to rent the equipment, and distribute proceeds back to you on a monthly or quarterly basis.
14. Tax Liens
Tax liens are an interesting type of alternative investment for those who have an interest in real estate investing but aren’t sure if property ownership is the right fit. When property owners fall behind on their property taxes, the local taxing authorities can hold auctions in which locals can bid to own that tax debt. Rather than bidding up a purchase price for the debt, investors bid down the interest rate on the debt; the lowest rate wins. The winning bidder then pays the back taxes to the taxing authority and makes payment arrangements with the property owner to collect their principal and interest over time.
In many states, tax lien holders can foreclose on the property if the property owner fails to repay the debt. So it is possible, albeit unlikely, to end up with the deed to a property from your tax lien investing.
Infrastructure investing involves owning a share of the framework that supports utilities. You could, for example, purchase an oil rig, a cell phone tower, or a section of a pipeline. While it is possible to purchase pieces of infrastructure independently through a limited partnership, it is typically safer and easier to invest in infrastructure via a real estate-based security, like a REIT.
Consider Alternative Real Estate Syndication Investing with Gatsby Investment
Gatsby investment offers real estate investment opportunities for accredited investors. With our real estate syndication services, you can benefit from low investment minimums, higher-than-average yields, and completely passive returns.
Through a wide range of investment types, we can accommodate both short-term and long-term investors. You could build a portfolio that produces income and appreciates in value over time! Or you could take advantage of fix-and-flips as one of the best short-term investments in real estate! Gatsby provides some of the best alternative investments to help you reach your investment goals in 2023!