Many investors are fed up with Wall Street. A recent poll showed Wall Street’s approval rating is at an all-time low. Investors are hungry for alternative investments.
We’ve done detailed research on all of them, invested in many of them ourselves, and present our research here.
- Passive Real Estate Investing
- Private Money Lending
- Angel Investing
- Peer to Peer Lending
- Real Estate Crowdfunding
- Precious Metals
- Hedge Funds
- Private Equity
- And more…
So why should an investor like you look at these investments? Here are just a few of the reasons:
- Higher returns – industry experts and third party studies have shown that many of these investments can return anywhere from 10-25% annually. From our experience, returns can be MUCH higher – usually in the 20%-60% annualized range.
- Lower risk – many of the investing options are backed by hard assets such as real estate and represent lower risk than many investors perceive.
- Control – If a stock price plummets, there’s nothing you can do about it. With many of these investment types, you have options. You have control.
- Fun and fulfillment – these types of investments tend to be much more meaningful for investors. They report that they ultimately have more fun and feel better about investing in projects with which they have a connection.
NOTE: If you’re satisfied getting middling returns from mutual funds, believe the government will take care of you in retirement, or are perfectly satisfied with the Wall Street status quo, THESE INVESTMENTS ARE NOT FOR YOU. These investing options are for sophisticated, savvy investors looking for higher returns, more control over their money and future, and a deeper connection with their investments. Proceed at your own risk.
All of these investments can be invested in small amounts, for sometimes as little as $25. Invest at your own risk tolerance levels.
Investors can also use retirement accounts like 401k’s and self-directed IRA’s for any of these investments.
– Kriss Bergethon, Chaz Shively and the Team at The Franklin Society
Private money lending is fairly simple and straightforward. Typically, private money lending — or “hard-money lending” when it’s a company that makes professional, continual investments — is where you as an investor lend money to a real estate investor or someone that has strong collateral (a car, appraised art, etc.)
Your money is protected by a hard-asset, typically some form of real estate. So, in the off-chance that the borrower can’t pay back the money, you can take back the real estate collateral. Then you can sell the collateral and get a portion, all of, or all of your money plus some profit.
If you lend “private money,” you can expect to charge a loan origination fee which is typically 2%-5% of the loan amount. You usually get paid this at the time you make the loan. Then, on top of that, you charge between 10%-15% interest. Often the borrower returns the money, plus interest in 4-6 months.
Let’s See How The Numbers Work
Let’s say your borrower needs to buy a property for $100,000. The property needs $20,000 of repairs, and the borrower is going to sell the property for $150,000. That is a $30,000 spread for them, but after broker’s fees and carrying costs (you!), they should make $20,000. Knowing they should make some good money protects you as well.
You agree to lend the borrower 80% of the total costs so that they have 20% “of their own skin in the game.” You agree to charge them “3 points” (3 percent of the loan) plus 12% interest – fairly typical numbers. We’ll keep the math simple for this example by excluding closing costs, brokers’ fees, and other costs. So:
- They need $120,000 to buy and complete the project.
- 80% of $120,000 is $96,000. You decide that you can “round up” and loan them $100,000.
- They buy the property and pay you $3000 at closing (your “points.”)
- They invest $20,000 to fix the property, which takes a month. The property is on the market for two months, and closes a month after that. So your money is lent out for 4 months.
- When the property is sold, you get paid back your $100,000 investment, plus 12% interest, which for 4 months is $3000.
- All in all, you made $6000 ($3000 in points, $3000 in interest) on your $100,000 investment – a 6% cash on cash return. Since the investment was 4 months though your real annual return was 18%.
- Not bad for a fairly protected investment.
A Deeper Look at Private Money Lending
Private Money Lending is one of most secure ways to lend money, as it’s backed by a hard asset. Some other factors of this type of investment strategy are:
- It requires less due diligence of the borrower – because you have the asset there to protect you.
- In the case that the borrower defaults, you usually “win big.” (In our example above, you would likely make another $15,000 on your $100,000 investment!)
- These are generally larger loan amounts, often $50,000+.
- They generally make annualized returns of 20%+
- Paperwork is easier than you think. Once you “do your first deal,” you can essentially reuse all of the paperwork for your next deals.
Peer to peer lending involves lending money to individuals through a central lending platform. The two most popular platforms are LendingClub.com and Prosper.com. The loans are generally made to individuals who are paying down high interest debt like lines of credit and credit card debt.
Returns vary widely between 5% and 20% based on the borrowers credit ratings, income, and credit history. The higher the risk, the higher the return for the lender. The borrowers are rated on a scale of A through F generally.
The industry as a whole is exploding. The Federal Reserve estimates that the industry has grown 84% PER QUARTER since 2007. Lending Club alone loaned $5 billion in the first half of 2014.
So How Does it Work for Investors?
Lenders (or investors) create an account at one or both sites listed above. It is recommended to start with a small investment of $10,000 or less and add as your results get better over time. Lenders can use filters such as credit score and monthly income to narrow down loan options.
As soon as the loan amount is fulfilled by lenders, the borrower will get the money and start making payments the following month. Those payments, based on how much you lent, will be distributed to you within a week.
Veteran Lenders Do It This Way…
As with any investment, it is best to align your investment with your risk tolerance. Of course, since this is unsecured debt for individuals the delinquency rate can be quite high, especially for the higher risk loans. So it is suggested to make a lot of small loans that align with your risk tolerance.
There are several watchdog sites that analyze the data of the major lending sites to cull the best ways to get the highest returns. Some of the best include NickelSteamroller.com, LendingMemo.com, and InterestRadar.com.
Our research shows that lenders can get consistently above 11% and often as high as 14% returns when using these types of filters:
- Invest in lower grade loans in the D, E, and sometimes F ranges
- Look for individuals with higher incomes and a minimum of $6000 per month.
- Look for individuals with very few or one credit inquiry, this means that they have not been shopping for credit.
- Invest the minimum, often $25, in a lot of loans. You can even set up auto-lending features on each site so that you automatically loan small amounts in loans that fit your criteria.
Market – Beating Profits Make It Worth a Look
Peer to peer lending can be very lucrative and satisfying. With the advanced filtering techniques you can consistent returns above 10%. You also get the satisfaction of knowing that your money is going to help real people. These people are generally trying to turn their fortunes around and borrowing money at reasonable rates to pay off high interest debt is often the best way to do that. They are not always successful at it of course, but the success rate is very high.
The delinquency/default rate on even the high-risk loans is only 24%. This factors into your total returns of course, but again if you spread your risk over many loans you can get consistent, marketing-beating returns.
The complexity of this kind of investment is pretty low. Investors may find the sheer volume of possible loans overwhelming, but using the filters mentioned above can help. But overall this is pretty simple; you’re lending money to individuals around the country, and they pay you back regularly.
Angel investing has a mystique about it that may or may not be reality. Many people envision ‘Shark Tank’ like environments and Silicon Valley billionaires betting on the next Facebook. While that is certainly a part of it, the reality is that the vast majority of angel investing is done on a smaller and more localized scale.
Does the Average Angel Investor Actually Make Money?
A Kaufman Foundation study found that angel investors, especially when working in groups, often achieve reliable gains of 25% through angel investing. The study found that the best results occurred when the investments were vetted in a group setting, investors pooled their money, and individuals invested small sums in a large number of investments.
How You Can Be An Angel Investor
So how do you become part of a group? It used to be that investors in angel groups had to be accredited (very high income) but this has changed recently. Legislation passed in 2012 makes it legal for all investors to invest in these types of vehicles. Some angel clubs still require accreditation, but this is changing quickly too.
The best way to get started is to find a local angel group to join. Well-established clubs are usually members of the Angel Capital Association. These clubs generally invest on a local level and offer opportunities to invest in everything from products, to local real estate projects, to your corner store that is looking to grow. This is a great way to get involved with local businesses and entrepreneurs while still acting as a passive investor.
If you can’t find anything locally or would like to be exposed to more national opportunities, there are a lot of online resources. Websites like AngelInvestorsNetwork.us and Gust.com offer ways for investors to get started in the national angel scene. But the options can be so overwhelming that you may never really be able to pull the trigger.
A Way to Let the Experts Decide Where to Invest
If you want to invest in larger scale companies that have a larger upside and are more likely to get acquired or have an IPO, then Angel.co might be for you. This is an online portal where investors can follow and invest with the real experts in the field.
Seasoned angel investors and multimillionaires create ‘syndicates’ where they encourage investors to follow along with their personal investments. The experts will tell you how much they are investing and when, and you can decide on your own if you’d like to invest, often for as little as $1000.
A recent study revealed the most successful angel investors on Angellist. The successful angels are very well connected to the start-up scene nationwide and have a fantastic track record. Some of the names include Tim Ferriss, Jason Calacanis, and even actor Ashton Kutcher.
Caution: Angel Investing is Not For Everyone
Investing like this is not for the faint of heart. It has been well documented that most startups that seek angel investments fail.
From our experience and research, out of ten investments, 1 will return 15-20 your money over a 5 year period, 3 will return your money without growth, and 6 will fail outright. So the big hits, the companies that really do well, have to make up for the other failures.
And the window for getting your money back can anywhere from 3-6 years. It’s not like you can call the company you invested in and ask for your money back. These investments are illiquid.
But, there is no denying the excitement of investing in something that you not only believe in, but that could (quite possibly) go really big.
One of the fastest growing investment vehicles over the last 5 years has been crowdfunding. There is a lot of confusion about what exactly crowdfunding is however. There are many sites like Kickstarter and Indiegogo that help people crowdfund products, video games, and movies. The rewards for giving to these projects are generally early access to the products themselves. In other words, people who give to the campaign get first access to the products.
Equity crowdfunding is now legal after passage of the JOBS Act. Equity crowdfunding means you can actually own a piece of the company. While the specific rules are still being formulated as we speak, investors have access to some very interesting crowdfunding projects now. Crowdfunded real estate development is one of the least risky options while still offering great returns.
Real estate crowdfunding platforms have gone from $1.5 billion in 2011 to a projected $10 billion in 2014. This is clearly a fast growing investment vehicle.
Great Returns Backed By Real Estate
Real estate developers and investors submit their projects to one of the main real estate crowdfunding sites like RealtyMogul.com, RealtyShares.com, or Fundrise.com. After a lengthy due diligence process done by the sites themselves, their deals are then listed for investment from the public. Each site listed above states that they only list 5-10% of the projects that they look at.
Some sites are only looking for accredited investors, but none of them as of this writing require verification of accredited status. You simply sign a document saying you’re accredited.
You can then choose from two types of investment: debt or equity. Each has its own risks and drawbacks. Debt funding is actually loaning money to the project. The debt will be paid back before shareholders are. And the debt is backed by the real estate itself with a deed of trust held by the investing portal (ie RealtyMogul.com). Because there is little risk in the real estate falling to zero in value, this could be likened to a corporate bond.
Returns with crowdfunded debt is generally in the 6-9% range and is considered to be relatively safe.
Equity real estate crowdfunding returns are closer to the 15-20% range depending on the project; the more speculative the project, the higher the returns.
As with many investments like this, spreading risk is key and experts in this field suggest investing in many projects with your preferred return instead of a few.
Why Now is the Time to Try Crowdfunded Real Estate
Crowdfunding in real estate gives investors a huge selection of pre-vetted real estate projects to choose from around the country. There are apartment buildings, mini-malls, housing tracts, office buildings, and trailer parks; every kind of real estate project imaginable.
This really boils down to investing in real estate in a purely passive way, without the headache of owning real estate and dealing with construction projects. Investors should always add an additional layer of due diligence of course, which can increase the level of complexity.
But for those looking for diversification into what is becoming a very hot real estate market nationwide, Crowdfunded real estate can offer higher returns and the satisfaction that your money is going into a brand new building.
In talking with fellow investors and millionaires (and multi-millionaires), there is usually a common component to their wealth – real estate.
There are so many magical elements of real estate:
- At least for residential real estate, “everyone needs a home to live in,” so there will always be a need for it – regardless of the state of the economy. It fits at the bottom of Maslow’s hierarchy of needs pyramid.
- “There is only so much land.” (making an exception for Holland) Desirable locations – whether it’s “prime beachfront property” near Los Angeles, high-yielding farm ground in Iowa, or a nice neighborhood in Raleigh, there is limited supply of options for people.
- There is generally an opportunity to add measurable value to the asset.
- Typically, assessing values can be done very accurately.
Doesn’t Real Estate Involve Leaky Toilets and Evicting Weirdos?
No, what we are talking about is PASSIVE real estate investments: Not buying real estate, not owning rentals (though we advocate that too, but that’s another day’s topic), but finding real estate investments where you invest funds, following our blueprint to ensure your cash is protected, and generating returns that hard to match anywhere else.
What Kind of Profits Are We Talking About?
Over the years, we have seen and made passive investors annualized returns usually in the 30%-60% range. One investor invested roughly $300,000 over the course of a year, and he made over $70,000. That’s a 23% cash-on-cash return. But, here’s what’s really exciting: his money was invested for an average of 5 months…making his annualized returns 57%!
One of our investors recently did a “bum deal” and he made a measly 15% annualized return. Where else can your “bad” deals make 15% returns? That same investor is currently funding a real estate investment of $215,000, and is on track to make $50,000 on that investment over the course of 4-5 months. That’s nearly a 70% annualized return.
And you don’t have to have hundreds of thousands of dollars to get started. We’ve seen investors use as little as $20,000 to get started.
We continually pass on real estate investments that “only make a 20% return.”
Sounds Great, How Do I Get Started?
There are a few steps:
- Finding opportunities: Here you are not going out and actually looking for real estate to invest in. You are putting in place a system, so that the opportunities come to you either through phone calls, meetings, or emails.
- Double-checking that they are good: Once you have opportunities coming in, how do you choose which ones are the best fits? How do you make sure that the opportunity is as good as it sounds?
- Putting protection mechanisms in place: Ok, now you like a particular deal. How do you ensure you have maximized all of the protections you can have in place?
Precious metals investing has been around for centuries. Its the oldest form of investing by a long shot. Generally precious metals investing involves holding physical gold, silver, or platinum in private storage. This can involve buying bars of the precious metal but is often done with coins to make exchange and storage easier.
Recently many companies have made this process easier by buying and storing physical gold for their customers. These investments can be held in IRA’s and other tax shelters as well. This is a no-hassle way for investors to enjoy the security and value of precious metals without the storage and security concerns. One such company is called Regal Assets. Obviously this poses some risks as well.
Precious metals investing involves one of these three metals:
- Gold is the oldest investment vehicle on earth. It still holds a major roll in nearly every country’s banking and cultural system. When banks get nervous about the economy, they tend to buy gold. It could be considering one of the safest precious metals in that it holds its value well, but because it is traded so heavily on sentiment (and not supply and demand) its often the most volatile metal to invest in.
- Silver could be considered the unsung hero of metals investing. Silver is traded almost entirely on supply and demand concerns so in a way its price is steadier and easier to predict. Its also heavily used in industrial and technology applications so demand is solid. The exponential rise of demand for electronics in emerging markets has led to a recent bear market for the metal.
- Platinum prices often make it the most precious metal on the planet. Its often used in jewelry but its use in automobile manufacturing drives the majority of the demand. Platinum, like diamonds, can be subject to cartel-like price fixing as supply is concentrated in Russia and South Africa.
Hedge funds are often seen as the holy grail of alternative investments. We hear of billionaire hedge fund managers that made their money making their clients very wealthy. Unfortunately the truth is that they made their clients WEALTHIER as hedge funds are generally only available to the very rich.
Many funds have a 7 figure minimum investment and even then the hurdles to investing are formidable. Hedge fund managers know that if they get too big their competitive advantage disappears as they become a market mover instead of a market exploiter.
There are several types of hedge funds in existence, although most funds use a blend of many strategies:
- Long-Short Funds take both long and short positions in securities in hopes of taking advantage of market inefficiencies.
- Market Neutral Funds are similar to Long-Short Funds, but are generally trying to hedge against markets movements.
- Event-Driven Funds try to take advantage of mergers, acquisitions, political turmoil and even natural disasters to make money.
- Macro Funds take positions based on what they see as forthcoming big economic trends.
Private Equity is simply holding stock and related securities in companies that are not publicly traded. This, like hedge fund investing, is often limited to accredited and very wealthy investors. Private equity groups often view investor relations as a drag on their time so raising capital from a few very wealthy clients is preferable to raising small amounts from a large number of investors.
There are several classes of private equity:
- Leveraged Buyout funds have become the de facto private equity options for most investors. These funds seek to buy under valued businesses, grow them substantially and then ‘flip’ them for a large profit. Private equity funds in this space seek to combine separate businesses in the same industry to increase profit and reduce overhead.
- Venture Capital is investing in the early stages of companies that have huge growth potential. These companies are usually focused in industries that are easily scalable over short periods of time, such as technology, software, and health sciences. Venture capital is clearly one of the riskiest investing endeavors but as such can yield returns that are not available anywhere else.
- Growth Capital involves in investing in more mature companies that seek capital for continued growth or a transformational business opportunity. Investors often see lower risk with growth capital as the companies involved generally have more stable revenues and customers.
- Mezzanine Capital is usually raised as part of leveraged buyout or merger to reduce the amount of traditional financing founders must seek. This is often seen as a loan and, while paying more than traditional bank rates, the mezzanine lenders take a secondary debt position and will be paid back after traditional financing is paid.
For investors seeking private equity deals, it often comes down to ‘who you know’. Private equity is often raised by word of mouth and is rarely advertised.
While we only selected a few of the ways to invest “beyond Wall Street” in this post, there are so many easy, tried-and-true ways to invest. Here are a list of more options:
- Offshoring Your Money: We can help find safe, private places to invest your money overseas.
- Equity Crowdfunding Businesses: Invest with others in tech start-ups (the next Facebook or Twitter?), bio-medical companies, a restaurant down the street, or nearly any other business.
- Bitcoins: This underground currency could change the world financial system. The upside on Bitcoin investing is astounding. It’s a developing investing option.
- Investing Overseas: One of the biggest diversification strategies out there…place some of your funds outside of “home” to generate
- Car Flipping: While not passive, for those who love cars this is fun and very profitable.
- Real Estate Wholesaling: Like car flipping, this isn’t passive, but for those with little or no cash, it’s a great way to make quick, relatively easy money.
- Farm Land investing: Many investors, even those who live in the city – have farm ground that a farmer-partner raises crops on, and everyone shares in the abundance. With grain prices so high the last few years, strong annual (or bi-annual) returns are generated – and you end up with a lot of land…something to pass on to your kids or grandkids.
- Private Oil and Gas partnerships: Own part or all of your own oil well and see income for years.