Real estate is a popular investment asset class that can generate stable cash flows through rental income. However, direct real estate investing requires large capital outlays and active management. For investors looking for real estate-like returns without the hassles of being a landlord, several alternative investments provide similar benefits. These include REITs, real estate crowdfunding, farmland, infrastructure, and triple net leases. By understanding the cash flow profile, risk levels, and return potential of each, investors can construct a portfolio with real estate-like qualities tailored to their specific needs and constraints. Proper due diligence and diversification across multiple alternatives are key to optimizing risk-adjusted returns.
REITs provide liquid real estate exposure and dividends
Real Estate Investment Trusts (REITs) offer exposure to commercial and residential real estate without direct property ownership. REITs own and operate real estate assets and are mandated to pay out 90% of taxable income as dividends. This results in dividends yields of 3-8%, providing a steady income stream akin to rental income. REITs offer diversification across property types and geographic regions, with most specializing in sectors like apartments, offices, malls, etc. Investors can access REITs via individual stocks or ETFs. While REITs are liquid investments, their shares can fluctuate in value based on real estate market conditions, interest rates, and overall stock market sentiment.
Real estate crowdfunding provides fractional ownership
Real estate crowdfunding platforms like Fundrise allow investors to purchase shares of specific properties. Minimums can be as low as $500, enabling broad diversification across small positions in multiple assets. Investors receive periodic income distributions equivalent to their share of rental income generated. While not as liquid as REITs, crowdfunded properties can be sold on secondary markets. Real estate platforms handle property selection, management, and reporting. However, due diligence is critical as investments are unregulated.
Farmland generates income from crops and land appreciation
Farmland is a tangible real asset that generates income from crop production and land appreciation over time. Average returns have been comparable to stocks but with lower volatility. Farmland REITs like Gladstone Land provide a liquid way to invest in a diversified portfolio of farms leased to farmers. Direct investment in farmland has higher barriers to entry but can produce higher income. Farmland has low correlations to traditional assets, providing diversification. However, returns are sensitive to commodity price fluctuations and adverse weather conditions that impact harvests.
Infrastructure assets offer high yields and stability
Infrastructure includes essential assets like roads, bridges, railways, airports, seaports, utilities, etc. Many generate steady cash flows via long-term contracts or regulated rates. Infrastructure can be accessed via REITs, funds, or direct investment in projects. Core infrastructure has high barriers to entry and monopolistic qualities, leading to stable yields of 6-8%. Greenfield projects have more construction risk but higher potential returns. Government policy and regulation are key risks to monitor.
Triple net lease properties provide hands-off passive income
Triple net lease properties are fully rented out to tenants on long leases that require tenants to pay property taxes, insurance, and maintenance — the three ‘nets’. This transfers operating costs and responsibilities to tenants, providing passive income for landlords. Premiums above market rents compensate landlords for tenant credit risk. Individual properties can be bought for $2-$5 million. REITs like Realty Income aggregate triple net assets into larger diversified portfolios. While initially defensive, nnn lease returns may lag if rents fail to keep pace with inflation over decades-long leases.
REITs, real estate crowdfunding, farmland, infrastructure, and triple net leases can provide alternative ways to gain real estate-like returns. Each offers differentiated benefits and risks that should align with investor goals, constraints, and risk tolerance.