How Do Alternative Investments Yield High Returns?
Updated: Jan 31
Alternative investment strategies are becoming the fastest-growing segment and becoming increasingly popular with a great mix of investors in the retirement market.
As you may know, Alternative investments have a low correlation to stocks, bonds, or both traditional asset classes. In addition, alternative investing is more common, well-known, and focuses on mitigating market uncertainty because of the available options. For example, many investors know the ins and outs of real estate but can't navigate or have the time to manage the often complex world of Wall Street.
This is reason one why alternative asset investments have become popular, simply because of "real" assets tied to retirement accounts.
As alternative investing has increased with various investors, so has using Self-Directed IRAs to fund this portfolio strategy.
Why Self-Directed IRA?
An SDIRA is a type of individual retirement account (IRA), giving you, the investor, control over investment decisions to expand your retirement options. Self-Directed is a term for accepting or offering alternative investments by an IRA custodian responsible for record-keeping and IRS reporting.
Surf Dinani says -
"Typically, the clients I see investing in real estate via self-directed individual retirement accounts (SDIRAs) are reasonably well off and have decent-sized retirement plans, including a 401(k), IRA, or both. These investors will usually pull out a percentage of IRA money, form an SDIRA account, and put those funds into a private equity real estate investment for two reasons: they think it is a good investment and non-correlated, or Wall Street connected."
For direct investment in real estate, the return will ultimately hinge on the project itself. Most clients who invest in real estate deals know that industry pretty well. They're likely already investing in it through their finances and decide to utilize some of their IRA for that purpose as well.
What are the benefits of investing in alternative assets in my SDIRA?
We've seen how most Americans focus their attention on building retirement investments, such as IRAs or 401(k) plans, or personal savings, through connected stock market investing.
The scope of this investment, over 90% of retirement assets are invested in the financial markets with an estimated $30 trillion in retirement assets (2018), as one would realize, when the market tumbles, as in 2008's Great Recession, so do all these connected accounts.
Like market fluctuations, inflation with rising food, gas, and other circumstance increase risk in traditional markets. Investors see inflation as a significant concern and look for other strategies that work to keep every dollar's worth value for today and tomorrow. Alternative investing can help in this regard by using SDIRA funds in different categories.
2. Investing in Hard Assets
Buying hard assets is seen as one way of protecting your portfolio from inflation. Many investors recognize that investing in various real estate asset classes can provide natural protection against inflation.
As you may know, rent tends to increase when prices increase, acting as a hedge against inflation. Real estate is among the most popular options since investments leverage disadvantaged properties or new construction to bolster a fund's performance. Investors seeking access to alternative options like real estate can also use their SDIRA account to access many others in addition to hard assets (see list below).
3. Higher Yields and the Illiquidity Premium
SDIRA alternatives (see list below) are primarily illiquid. Portfolio managers working with investors can offer higher income-producing investments that can perform better than traditional portfolios due to the underlying liquidity, complexity, credit, and leverage risks. Alternative investing allows long-term potential to earn greater returns by holding such assets longer. In a low-interest-rate environment, a higher yield may be an attractive feature for many investors.
Alternative Investing Assets Funded Through SDIRA's
Private equity investments
Private corporate debt instruments
Real estate notes and trust deeds
Gold and precious metals
Why is Real Estate the Primary Investment Vehicle in an SDIRA?
Basically, real estate is, well, REAL. We understand it. It's tangible, finite, and has historically been a multigenerational builder of wealth over many years. So, why don't we invest in real estate to grow our IRA? Unlike traditional securities, investing in real estate allows the SDIRA owner total control.
This makes a self-directed IRA real estate strategy a good one for hands-on investors who want more than a passive approach to their retirement.
What's more, investing in real estate using a Self-Directed IRA can deliver potential tax benefits. As is the case with any investment in your IRA, you benefit from tax-deferred income until the day you take withdrawals.
So, imagine investing in real estate and taking the funds generated and pushing them back into your IRA at potentially a much greater rate than traditional financial investing. Or, rolling your funds generated into another real estate project, tax-free, to gain access to more potential of escalating returns while maintaining the tax-deferral status of the IRA.
How Do I Access Real Estate Investing with a Self-Directed IRA
At Veloce Capital, our core focus is to educate our investors. By providing a personalized approach, Veloce Capital discusses opportunities, market, industry trends, and fund performance with meaningful data points for investors to make educated decisions while feeling assured that process and policies are in their interest.
We help build a more sophisticated investor base.
The investment options available to those using self-directed retirement accounts go way beyond real estate. We work with several reputable trust companies to provide individual investors the ability to set up SDIRAs. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will provide much-needed guidance as you travel through the murky and confusing waters of the IRS tax code. As always, we welcome the opportunity to discuss further and make referrals when appropriate.
Dispelling cloud of confusion
In summary, we believe that IRAs or 401(k)s automatically translate to publicly traded investments is just not true. It's just not the case. You can self-direct and invest in alternatives, and the process is open to many more people. Investors who recognize this option can consider alternative investments using self-directed IRAs as a viable option to diversifying their portfolio and accessing high-yielding returns.