In this capitalistically driven society having a stable financial future is one of the main goals of potential, current investors and capital holders. The development of good financial habits, but also extensive research and assessment can help lead you to a financially successful future and a strong investment portfolio. In recent years, alternative investments, or simply alternatives increased in popularity, moving away from traditional/mainstream asset classes such as public equity, fixed income and cash equivalents. The rising demand of the market paved the way for new alternative investment opportunities making it diverse and reducing the overall portfolio risk. But with the consequences of the current coronavirus outbreak unfolding in front of our eyes, is investing during a pandemic a smart move, and if so, what has been gaining traction?
Alternatives being one of the most dynamic asset classes cover a wide spectrum of investments with unique characteristics. Private equity (venture capital, growth capital and buyouts) as the baseline and new, more recent examples of prominent alternative investment such as real estate, cryptocurrency, forex, commodities, art, cars, wine, even diamonds. Most successful investment portfolios are built in such a way that they maximize returns and minimize risk. Portfolio diversification is favored by modern investors which basically means adding alternative assets with low or negative correlation to traditional assets. The recommendation is an appropriate mixture of stocks, bonds and alternatives in addition to a proper blend of domestic and international assets. The investors bet on generating higher returns in alternatives as they are illiquid, unregulated and come with some tax benefits. Among high net worth investors, pension funds and large institutional investors the most popular alternatives are hedge funds, private equity and real assets. Private equity and hedge funds are built around a structure that allows exploiting different marketing opportunities by pooling funds from many individual investors. Real assets on the other hand include physical assets like real estate – the world’s largest asset class, land, infrastructure, equipment or natural resources. Over the last couple of years, real assets have seen significant growth correlated to low-interest rates and predictable cash flow.
Speaking of real estate, it is important to analyze the types of investing and property acquisition as a part of a successful investment strategy. Prospective investors, unlike stock and bond investors, use leverage to buy properties by paying a portion of the total price – down payment and paying off the balance later on, plus interest. In some cases, 5% is all it takes to purchase an entire property, while traditional mortgages require a 20-25% down payment. The ability to control the asset the minute papers are signed encourages real estate flippers and landlords, who can, sequentially take out second mortgages and acquire more properties. Owning rental properties maximizes capital through leverage, tax deductible expenses and regular income if you can invest substantial capital to cover vacant months and up-front maintenance costs. Real estate investment groups (REIGs) on the other hand are for those investors who want to own real estate but don’t want the inconvenience of running obligations. The way they work is like small mutual funds that infuse money in rental properties; a company buys or builds apartment blocks or condos and later allows investors to join the group by purchasing through the company. On the other hand, this following type of investing – house flipping requires significant experience in property valuation, marketing and renovation. Capital is essential as well as the capacity to do and overlook repairs and renovations. Real estate flippers are distinctively different from buy-and-rent landlords; they often look for undervalued properties, make them more profitable and then sell them at a higher price rate in less than six months. This way of investing ties up capital for a shorter time period and can offer quick returns in profit. The next stop are real estate investment trusts (REIT) and they exist for those investors who want portfolio exposure in real estate but without a traditional transaction. When a corporation or trust creates a REIT, it uses investors’ money to purchase properties, operate income and can be bought and sold on the stock exchange. 90% of taxable profits in the form of dividends must be paid out so a company can maintain its REIT status. The only potential downside could be the fact that leverage associated with traditional rental real estate is not applied. Last but not least, online real estate platforms are gaining traction and popularity among those who want to invest but don’t have the necessary funds. It occurs via online real estate platforms by an individual joining others in bigger commercial or residential deals and it’s also known as real estate crowdfunding. Stable cash flows and less exposure to the real economy is the main advantage, so even if the economy downturns, most people will keep paying their rent. Another upside is that often, crowdfunding platforms have low minimum investment requirements which boasts accessibility and diversification. This basically means that you don’t have to be a high net worth investor ($1-$10 million dollar liquid net worth) or a ultra high net worth investor (at least $30 million dollars in investable assets) in order to acquire real estate property and diversify your alternative investment portfolio.
In these unprecedented times, as the effects of COVID-19 are felt globally and in almost all fields, real estate investors and companies are being impacted in different ways, mainly depending on asset class and region. The main concern is preserving value and liquidity, keeping tenants and visitors safe and carrying out new health regulations (cleaning measures etc.) and governmental agency requirements. While 63% of alternative investors do not anticipate changes to their investment plans, the reality is a bit different. Some areas are performing better than others while some are struggling to keep up with the economic and social consequences of the pandemic. The economy came to a sudden halt in the beginning of 2020, practically overnight and very abruptly so an exceptional global recession is inevitable. This economic turmoil brought on by the COVID-19 crisis will most definitely affect real estate, but in what way? Is investing in real estate during recession a smart move? So it seems. An economic slowdown may be potentially lucrative for investors looking to acquire properties, especially when the stock market is doing poorly. Real estate seems to be a safe haven for investors since real estate values actually increased during three of the last five recessions.
So, in conclusion, real estate is potentially the most secure investment despite the economic downfall of 2020 caused by the coronavirus pandemic. If you have the funds and are looking to diversify your alternative investment portfolio property possession might be your safest bet. As for the market itself, experts estimate a U-shaped recovery meaning that once the lockdown measures are lifted and coronavirus is taken under control the recovery will materialize. The healing will likely continue in 2021 with a little help of exceptional stimulus measures taken on by governments and banks. To sum up, if you were affected by the backlash of the pandemic, it’s important to assess potential short and long-term impacts on the market, do the research on all the help you can get and plan and execute practical next steps accordingly. If you are, on the flip side, a potential investor and want to expand your alternative investment portfolio, real estate seems to be your golden goose.