Alternative Assets: What Are They and Why Should I Care?

[Jeffrey Allen]

Growing up the only investments I heard about were the traditional options like stocks, bonds, and funds (index, ETF, etc…) which have long been the go-to choices for many. However, as the landscape of finance evolves, so too do the opportunities for investors. Enter alternative assets – a category that encompasses a diverse range of investments beyond the “conventional”. Here, we'll explore what alternative assets are, provide a list of some noteworthy options, delve into the pros of investing in these assets, and ultimately answer the question: Why should you care about alternative assets?

Understanding Alternative Assets

Traditional investments, such as stocks and bonds, are integral components of most portfolios. They offer liquidity and a semblance of a degree of predictability. However, alternative assets present a different kind of opportunity. These are investments that fall outside the realm of “conventional” assets and can include tangible assets single family real estate, multifamily syndications, oil and gas, self-storage mobile home parks, mortgage notes, precious metals and more. These assets are quite sound The appeal lies in their potential to diversify a portfolio, reduce risk, and often yield higher returns that aren't directly tied to the performance of the stock market. So why are these assets called “alternative” when most people own real estate in the form of their house. They are labeled alternative because they do not fit in the box that financial advisors can profit from. The following is a list of some of these alternative assets.

A Diverse Range of Options

1. Single Family Real Estate:

Summary: Investing in single-family homes involves purchasing residential properties with the aim of generating rental income or capital appreciation.

Pros:

Steady Income: Rental income from single-family homes can provide a consistent and steady stream of cash flow.

Potential for Appreciation: Real estate values can appreciate over time, contributing to long-term capital gains.

2. Multifamily Syndications:

Summary: Multifamily syndications involve pooling capital from multiple investors to collectively invest in large-scale apartment complexes or multifamily properties.

Pros:

Economies of Scale: Larger properties can benefit from economies of scale, potentially leading to increased efficiency and profitability.

Diversification: Allows investors to participate in the real estate market with a shared financial commitment, spreading risk among multiple units.

3. Oil and Gas:

Summary: Investing in oil and gas involves participating in exploration, drilling, or production activities in the energy sector.

Pros:

Potential for High Returns: Successful oil and gas investments yield substantial returns, especially during periods of high energy demand and receive income through royalties or a share of the profits.

Tax benefit against active income: Investors may receive a tax benefit and offset W2 or active income.

4. Self-Storage and Mobile Home Parks:

Summary: Investing in self-storage facilities and mobile home parks entails owning or operating properties that provide storage solutions or affordable housing options.

Pros:

Stable Demand: Self-storage is often in demand during various economic conditions, providing a stable income stream.

Affordable Housing: Mobile home parks offer an affordable housing solution, catering to a broad demographic.

5. Mortgage Notes:

Summary: Investing in mortgage notes involves purchasing the debt obligation from the original lender, allowing investors to earn interest and potentially acquire distressed properties.

Pros:

Passive Income: Investors receive regular interest payments from the mortgage borrower.

Asset Acquisition Opportunities: Defaulted notes may lead to acquiring the underlying property at a discounted price.

6. Precious Metals:

Summary: Precious metals such as gold and silver have been traditionally seen as stores of value and a hedge against inflation.

Pros:

Safe Haven Asset: Precious metals are considered safe-haven assets, often retaining value during economic downturns.

Diversification: Adding precious metals to a portfolio can provide diversification benefits, especially when traditional markets are turbulent.

The Pros of Investing in Alternative Assets

1. Diversification:

Diversifying Risk: Alternative assets often have a low correlation with traditional assets, providing a buffer against market volatility.

Enhanced Portfolio Stability: Including a mix of assets that respond differently to market conditions can enhance overall portfolio stability.

2. Higher Potential Returns:

Opportunity for Alpha: Many alternative assets, such as multifamily, oil and gas, self-storage, mobile home parks, etc… offer the potential for higher returns, especially when skilled managers can add value to the investments.

Access to Niche Markets: Alternatives can tap into niche markets with high growth potential.

3. Inflation Hedge:

Tangible Assets: Investments like real estate, precious metals, and collectibles are often viewed as hedges against inflation, as their intrinsic value may be less affected by economic downturns.

4. Income Generation:

Steady Cash Flow: Assets like multifamily syndications, self-storage, mobile home parks and certain equity investments can provide a steady stream of income through dividends and distributions.

5. Portfolio Tailoring:

Customizable Portfolios: Investors can tailor their portfolios to align with their risk tolerance, financial goals, and investment preferences by including specific alternative assets.

Conclusion: Why Alternative Assets Matter

In the ever-evolving landscape of investment opportunities, alternative assets stand out as a pathway to diversification, higher potential returns, and unique exposures. While they may not be suitable for every investor, those willing to explore beyond traditional options might find that incorporating alternative assets into their portfolios adds a layer of resilience and potential growth and actually be safer than exposure to the stock market as you potentially own a physical asset.

As with any investment, thorough research, understanding risk tolerance, and seeking advice from financial professionals are crucial steps. The world of alternative assets is dynamic, and staying informed about emerging opportunities and potential challenges is key to making informed investment decisions.

So, why should you care about alternative assets? In a world where the only constant is change, diversifying your investment portfolio with alternative assets could be the key to unlocking new opportunities and navigating the unpredictable journey of the financial markets.