How Mixing Alternative & Traditional Investments Can Be Less Risky & Potentially Catapult Your Returns By 2.5x – 5x
00:00 – Introduction to the Show
00:44 – Introduction to alternative investing
03:09 – The spectrum of traditional and alternative investments
05:42 – An example of the results of traditional investmentsRead More
07:54 – An example of the results of alternative investments
10:39 – The power behind the ‘blend’
15:02 – Outro
Alternative investments – those words sometimes come with fear, confusion and trepidation.
What are they? Why are they considered alternative? And if they’re so well performing, why don’t more people do it?Read More
Investopedia defines alternative investment as:
“An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk.”
While that’s a great definition, I tend not to agree with their statement about complexity, lack of regulations and degree of risk.
Alternative investments, by their nature, are considered alternative because they’re not an investment strategy adopted by the majority. And in my experience, this is largely due to two factors with Australian investors:
- A lack of willingness to learn
- Self-limiting beliefs around investment opportunities beyond the borders of Australia
As an avid property investor myself, after taking out multiple loans, the banks told me that I couldn’t have anymore. For the average investor, this would have been a sign that they should settle for what they had and start to look into selling down to recoup some of the capital gains and to “settle down”.
Instead, I asked what – what else is out there? Surely the banks don’t get to tell me when I should stop.
And this where I began to explore the world of overseas real estate investments, namely American real estate.
After spending many years in the U.S. – what I thought was alternative investments were in fact normal forms of investing in the American real estate market.
Strategies like private funds, turn-key deals, becoming the bank and syndicates were all part of the everyday of investing in the U.S.
And most importantly of all, the net returns were significantly higher, less risky and more abundant than what I had ever experienced in Australia.
In this guide, I’m going to be showing you the numbers on what’s possible if you considered alternative investments as part of your strategy.
Note – despite there being much more to alternative investing, for the purpose of this article I will be using “alternative investments” with “American real estate investing” interchangeably, and “traditional investments” with “Australian real estate investing” interchangeably as well.
Firstly, can I use Alternative Investment Strategies in Australia?
The short answer is yes.
The long answer is – you can, but you shouldn’t.
Alternative investment strategies do exist in Australia however I don’t recommend them for a few reasons:
- They require significant amounts of capital to access
- Alternative investments are few and far because of our smaller market
- And because of the two factors above, deals are much riskier
While in American real estate:
- Capital required for each deal is smaller
- You can position yourself in first position, i.e. if someone doesn’t honour their end of the deal, you can take the property, just like the banks here
- You have a volume of deal flow – more opportunities due to a larger market
With the combination of the above, deals are significantly less risky.
What’s important to understand is that I’m not saying that there’s NO RISK in alternative investments, but relative to the Australian market, the American real estate market provides less risk due to the ability to diversify and introduce additional instruments to minimise your risk.
Now that we’ve got that out of the way, let’s get into comparing and explaining the differences between alternative investments vs traditional investments.
The Alternative Investment vs Traditional Investment Spectrum
Before I get into the weeds, it’s important to understand that there are many variables such as exchange rates, inflation and interest rates that can affect your overall returns.
But for the sake of simplicity and ease of explaining, I’ve limited these so that I can illustrate the potential value of alternative investments.
Now, take for example, you want to achieve $200,000 in passive income.
- If you were to be 100% in on traditional investments, based on a 2% net return, you would need $10m in Australian real estate
- If you were to be 100% in on alternative investments, based on a standard 10% net return, you would only need $2m in American real estate
That’s a 5-fold difference.
These net returns are far more important than gross returns, which are numbers that major supposed property investment gurus and advisors sell to you. It’s all about what’s left.
A 2% return for traditional investments in Australia is fairly standard and the same applies for a 10% return which forms the standard for many alternative investments.
What’s also important to be aware of is that I’m not arguing either is right or wrong – each asset has its place.
Instead, you should distinguish where on this spectrum you feel most comfortable.
However, there’s one thing you should know – if you’re serious about creating financial freedom prior to traditional retirement age (65 – 70), then you must consider alternative investments.
Option #1 – All in on Traditional Investments
Now, let’s hypothetically say you have $500,000 in liquid capital for you to use to invest.
Based on traditional models on leverage year, you typically put in 20% which can estimate a 4% purchase cost:
With $500,000 – these estimates mean that you can have assets worth up to $2,084,000 and debt of $1,667,200 and equity of $416,800.
With the Australian model, it’s all about capital gains and banking on the growth in property value. So let’s fast forward 10 years and see what returns that gives us:
As you can see, based on 4%, 5% and 6%, your asset would be valued higher.
For the sake of simplicity again, we hypothetically say that you choose not to pay down any of your principal debt (i.e. pay interest only) and therefore, it remains the same. The net values are calculated for you at the bottom.
Now, let’s take a look at a 2% net cash flow:
A return between $25,980 and $37,073 depending on the spectrum of growth.
Option #2 – All in on Alternative Investments
Again, for simplicity, we assume that there are no movements in exchange rates or inflation if you were to invest your $500,000 into the American real estate market.
Given the smaller size of deals, you have the luxury of being able to split your $500,000 into three separate opportunities:
I’ve used different net return percentages which are common for alternative investment strategies.
Based on this, this gives a total of $47,500 net cash flow.
Now, let’s fast forward 10 years again:
I’ve displayed this based on two scenarios:
- No compounding – you take out every day of your cash flow every year and choose not to re-invest it. After 10 years, you’ll have taken home $475,000 in cash
- With compounding – on the opposite end, you choose to reinvest every dollar and elect to let the money compound. Based on this scenario, after 10 years, your cash flow would become $1,252,180
Now let’s look at cash flow:
As you can see, with no compounding, your cash flow stays the same at $47,500 per year.
With compounding, you can see that across 10 years, that averages out to $122,188 per year.
Option #3 – Blending Alternative Investments with Traditional Investments
Remember how I told you that it’s important for you to distinguish what part of the spectrum you lie between alternative investments vs traditional investments?
Here’s where it gets interesting – going back to the hypothetical situation that you were all in on traditional investments..
If you decided that you wanted to try a bit of alternative investing and liquidate a portion of your traditional investments:
This is how much capital you would be putting into the American real estate market based on 30%, 40% and 50% of your net value (see alternate row).
Now let’s look at what happens to the cash flow:
Now, bear with me as there are a lot of calculations involved!
After all calculations, if you were to invest 30% from your Australian property investments into alternative investments, you’d see a total cash flow return of $66,545, 40% will yield you $78,288 and 50% would yield you $90,032.
So here’s the final “aha” moment that I want you to understand:
Comparing if you were all in on traditional investments vs. blending with alternative investments and traditional investments, you can see just how much of an increase in cash flow you could be missing out on.
We’re talking about an increase in cash flow of 212.5%, 250% and 287.50% based on 30%, 40% and 50% of your capital going towards alternative investments respectively!
As I said, I’m not putting down traditional investments nor am I completely advocating that you go all in on alternative investments.
Every investor has their own risk appetite. But what’s important is to not disregard alternative investments simply because you don’t understand how it works.
I’ve written up other articles around what these strategies entail and how the mechanics of these alternative investment tactics work.
But understanding the potential numbers means that you can really see the magnitude of what kind of great investment opportunities are out there that you can tap into.
Unfortunately, with the high entry costs to get into Australian property, I’ve virtually found it impossible without taking unnecessary risks.
For the majority of my clients, I teach them to build the biggest capital base in the shortest amount of time before figuring out how to ramp up their cashflow.
Many of them also find me when they’re ready to do the latter and we get into exploring opportunities in the alternative investment space that would suit them.
If you’re an investor who feels like their property investments aren’t giving them sufficient cash flow to retire on or become financially free, get in touch with me to find out if you would benefit from my Freedom Warrior mastermind program.
Ready to Get Started?
Apply for your 1-on-1 Mentoring Program Now
In this episode, we discuss the top...
In this episode, we discuss the...
In this episode Kan and I explore...
Welcome to the 169th episode of the...