From Hotels to RV Parks: The Ins and Outs of Alternative Investments
The Basic of Alternative Investments
Are you looking to diversify outside the stock market? Alternative investments might be the answer you're looking for. Investing in buildings, apartments or even employee stock options aren't just for the ultra-wealthy, you can have access to these funds from almost anywhere. In this episode, I explain how alternative asset funds work and how they can be added to your portfolio to reduce volatility.
I also cover:
How to do your due diligence on these investments
Strategies and considerations for individuals
Litmus tests you can have when reviewing & red flags to watch out for
I break down what makes a good fee structure
Time Stamps
00:13 Why Discuss Alternative Investments?
01:33 Understanding Reg D Private Placements
02:32 The Role of Advisors and Sales Channels
09:07 Investment Minimums and Market Timing
12:10 Evaluating Investment Opportunities
15:56 The Importance of Due Diligence
23:07 Hard Money Lending vs. Funds
27:51 Final Thoughts and Recommendations
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Welcome to me financial the podcast designed to inspire your financial life. Hello everyone. And welcome to the podcast.
I am Michelle Moses, your host, and today we are going to be doing a deep dive on alternative investments. I want to do this topic because. I've had some people listening to the podcast and then they say, Oh, hey, you know, I want to hear more about the alternative investments, or I was actually just talking to a friend this weekend.
And he was asking, um, about some of these, um, projects that he's seen around town. They were talking about how private equity. had developed these projects and he was like, well, how do I get in on this? Like, why am I just hearing about this now? And then we got into this huge conversation about alternative investments.
Um, so I want to get into some details. I know I had an episode early on about it and. honestly, it was fine. I just wasn't as good of a podcaster. I've gotten a little bit better and I want to do a deep dive on this. Whereas in that other episode, I talked about, uh, you know, different types of things that you could do with them.
You know, the real estate and the commer the different types of commercial real estate that you could do. But this time I want to really get into some of these deals because you can find them online. Um, there are websites that you can go to and find them. So I'd like to go over them just So that you know how they work, um, the fees that are involved and you know, just so that you know more about them.
And um, I do think it's important that we understand that these alternative investments, a lot of them that I'm going to talk about are for people that are called accredited investors and that's if you make over 200, 000, I have a million dollars of net worth. And even if you're listening and you're like, that's just not me.
I do think this would still be interesting because this is how, uh, people, a lot of people invest in whether the, if they're not just doing like hard money lending for things, which would mean that they're just loaning their money for different, um, projects around, you know, the country that they are investing in these, uh, Types of investments, and they are called Reg D, regulation, D private placements.
And Reg D is really just a government, uh, law, you know, it's the name of the law. And, uh, so that's what we call 'em is private placements offerings. Uh, yeah. And as I said, reg D private placements. So the, I wanna get into some of the details of them. I love them.
This is honestly what makes me stand out as an advisor, is that I not only do like the.
The stock market portion of stuff, you know, like managing 401ks and IRAs and things, but I couple everybody's investments with these alternative investments if I can, because it diversifies them outside of the stock market and I love them and I actually find them way more exciting and if I could do them, I would.
All the time I would. So let's get started. Uh, I already kind of talked about how they're reg D private placements and you have to be an accredited investor to get into most of them. With that, there is a caveat. There is a, a regulation called a plus, It is not very popular, but it does allow people that make under those thresholds to get into some of these investments.
They are a little bit more complicated, and honestly, you don't see a lot of them because it costs so much to do the legal paperwork. I mean, it costs hundreds of thousands of dollars to launch these investments in order to sell them to all of these people. And the reason that people put these investments together is because they're like, I'm going to use hotels.
I want to buy all these hotels, and I want to raise money from, you know, hundreds of different investors to do it. And there are regulations in place that if you are going to raise money by more than, I believe it's five people, then you are going to need to put together a fund. And if you're going to put together a fund, then you've got to have all these disclosure documents and the offering documents, I should say.
And you need to register it with the SAC. Uh, you know, there's all kinds of legal things and hoops that you need to go through. And then what happens is they basically hire a selling team and they'll go around to people like me or they'll sell it directly if they've got clients. It just depends on how the fund is set up.
Sometimes they will go to the advisor channel and then other times they're just going to go straight to kind of the private equity channel. And what that means is that, you know, these people are just salespeople and they'll call, you know, different offices of people that make a lot of money. And a lot of times those people will just chat and say, Hey, look at this deal.
I mean, these things can range from investing in a new appliance, you know, different things for houses, different technologies. Uh, cannabis was a huge one. Uh, and most of the ones that I deal with are oil and gas and real estate. Now, personally, I don't do a lot of oil and gas anymore just because it has gone up and down and I have lost my shirt on it a couple of times and I mean in stock.
And then I did have a client, one client invest in oil and gas and he lost everything. So these types of investments, the reason that they. Our four accredited investors only is because you can lose everything. I mean, it's, you need to think of it as you are investing with this company or with this person.
'cause sometimes there's just one person that's putting together a fund and you need to make sure that you can trust them because they are fundraising for their project. And if you give them money, and then I mean, theoretically, they could just skip town and move across the world, and you would never see your money again.
So these types of things are really, again, for experienced investors that know how to look at deals. or you need to be connected with someone like myself that can then sell you these types of deals. And you are going to see these like if you were, um, you know, so I'm independent. Okay, so I'm what's called the registered investment advisor channel.
There is a whole nother channel that's called the broker dealer channel. I make fees, they make commissions, and the only difference is that they have another company that's above them, and they are the ones that are reviewing all of these deals, and then they're saying, hey Joe, hey Sally, you guys are allowed to sell this, but the difference is, is that company is then taking, um, part of the fees, and so they're taking part of the fees, and these, and these funds will pay to get on their platforms, and then, you know, Sally and Joe can then go sell it to all of their clients.
Whereas they're coming, you know, the fund sponsors are coming directly to me and they're saying, Hey, Michelle, will you sell this to your clients? And because of that, then I can offer people a discount. And so that's why this is so popular with my clients also is that I don't make commissions. And so they get a discount on a lot of these funds that they're offering.
They're investing in. Okay. So that is kind of why people would do it. I guess. , this is gonna get long. I can tell. I love talking about these and I, you know, people, they're gonna stick with real estate in the hotels and they, so they wanna get, they wanna raise money. But you guys, I've seen all kinds of crazy things.
I gotta, I gotta go off on a tangent. I have been at some of these conferences and this one, so I mean, I've seen people raising money for like one RV park. Uh, there's one, a couple of guys that were raising money for, uh, these like African animals that they were going to sell to all these high net worth individuals that own these ranches.
And they basically go hunting on these ranches. And so they're just. And, uh, they got eviscerated on stage, but I was just flabbergasted that that was one of the items that we were watching because I go to these conferences. And basically what happens is they come up on stage and they've got, you know, a half hour or whatever it is, and they're just pitching their deals.
And then you go talk to them afterwards, if you're interested in them. Uh, so it can be anything, but most of the time they are for real estate. and oil and gas. And the real estate can just vary so much. I mean, it can be for restructuring debt on some of these buildings. I mean, a plain boring building that you can see on any side of the road that's for leasing.
Uh, you know, they call it like mezzanine debt and all these different levels of debt, uh, all the way to, you know, there's hotels, there's retirement communities, all of that. So when they're trying to raise large sums of money and chances are, If you see a apartment complex going up somewhere, this is probably how they raise the money.
So if you are wondering how, when you're, you're seeing how some of these projects get funded, this is it. If you're seeing in the news, oh, all private equity firms are buying up residential real estate so that they can do short term rentals, this is how they do it. They do it with these alternative investments that I'm talking about, these Reg D private placements.
So the minimums of these, not only do you need to. I have a minimum salary and net worth. Uh, there are minimums of deposits. And so a lot of times they start at 25, 000. I would say most are 50 and some are like 250, 000. It really kind of depends on the timing of the market. Like sometimes I would say a few years ago, 250 was.
And sometimes they'll start at those large numbers and then they move down because there's the same amount of paperwork, whether you're investing 50, 000 or you're investing 000. They still have to go through this same onboarding process of getting you in the system and tracking all of your dividends and interest that you make.
So a lot of times, they'll Start or try with these larger amounts. It just depends on if they're trying to only go for a smaller piece of the pie of investors, or if they're trying to go toward more towards, you know, what you just say, like the retail channel, whereas there's just all kinds of normal people, I guess.
So when you are going and looking at these things, and I want to tell you about this stuff because there are websites out there. And I think it's important that if you start to look at these websites and you're like, Hey, I want to get into these things, but I don't want to hire somebody like Michelle.
You can definitely listen to this and you can definitely start looking at deals. There's, um, I only know of one website. I know there's more. It's called, it's one called equity something, but I know there's one, uh, Yieldstreet does this. And so when you sign up, they'll say, are you accredited investor?
They'll, um, confirm your identity. Kind of like when you sign up for a crypto account, you probably have to give your driver's license, that kind of thing. So that they know that you are a person, just like if you'd have to do with me, I need to verify that you are a person that I have reviewed your finances, uh, before I can sell you these things.
Otherwise, I could get in a lot of trouble because then you could lose all your money and sue me and then they'd say, Hey, you didn't vet them in these, these investments always have offering documents and they range from, I'd say 150 pages to 350 pages, uh, not light reading at all. Most of the disclosure documents what they call the private placement memorandum, or they call them the offering documents.
There's so much lingo in these alternative investments. So the, The actual fund itself, you know, it's called the offering. They are offering, the sponsor is offering this to you as a potential investment. So they send these private placement memorandums out and that has all of the details that you need in it.
And then if you say you want to sign up for it, then you sign up with a subscription agreement, you are subscribing to the offering, um, and. These documents, as I said, are very long. They, uh, are really boring and there's a lot of lingo in there. And most of the time it is, you know, investing in real estate could take a long time and it's very illiquid.
It's just like boiler plate type stuff that they put into every single fund.
And I think the key is you've got to look and find where the sweet spots are of where the fees are. And there's usually an executive summary that you can look at and it will tell you who's sponsoring it. Who is how they're raising money, how much money they're raising, how long.
So that is another, uh, very important point is that these do not last forever. This is not like a mutual fund on the stock market. They are raising money from, you know, January 1st until August of next year. They can extend it. They often will have in there that they have an option to extend it for six months, because if they haven't raised all the money that they want.
Then they need to keep it open so that they can continue fundraising. But if they're good with the amount of money, then they can close it and then they can go and deploy all of the capital to go purchase houses or hotels or commercial, different types of commercial real estate. Uh, in, in these offering documents, there will also be, you know, what your minimums are.
Uh, the name of the fund and the objectives and the strategy and obviously that, you know, let's say they are buying the hotels. That's one of my favorite ones. So that's why I keep coming back to it. Uh, is their strategy is to uh, Fund hotels, refinance them and build, you know, two new ones in these different areas.
So usually, you know, they have a strategy. I saw one that was for an RV, like a luxury RV park one time. And, you know, obviously it went into, we're going to have a hot tub and we're going to have, you know, the different amenities for these participants. And this is what the fee will be, you know, and obviously there's so many, uh, Um, little disclosures in there of, you know, as, as long as the prices stay the same and because we've seen so many changes in real estate prices and so many changes in the, uh, amount that it takes to fund these, uh, or to borrow funds, I should say the interest rates, uh, and then the, I think the most important part obviously are the fees that the sponsor is going to charge and what's called your preferred return and what your expected return is.
Let's start with a preferred return because it's more fun because that's how much money you're going to make your preferred and not all of them have this, but some of them have what's called preferred return. And what that means is that in order for the sponsor of the fund to make money, They have to not only make you whole, they need to also give you a certain rate of return.
So a lot of times this is 8, 10, 12%. They have to give you that percent of return before they're going to make money. And then after that, usually there's a split of 80 20, where you make 80 percent and the sponsor makes 20%. And I'm just kind of giving you some of the best funds that I should say. The average return.
So if you're re if you're reading some of these online and they are way worse than that, then just know that there's better stuff out there. Uh, so the preferred return is how they need to make sure that you are getting made whole and you are also getting your preferred return. So it's kind of like, I wouldn't say guaranteed return.
That's why they call it preferred, but it is guaranteed if they're going to make, if they sell a hotel. And make so much money on it. You are kind of, you've got your preferred return that's coming back to you. The other thing to look for out for is the fees. And this is honestly where I turned down a lot of things or just even interviewing the sponsor.
Um, a lot of times I turned down different funds just because, uh, the sponsor is kind of shady, you know, I really go on how open and honest what their track record is. Uh, have they had any issues?
in their background, because a lot of times when you're looking at these things, there's due diligence reports that you can request.
And those are, those are reports that lawyers will put together saying whether the fund is, they don't give, they don't say, yes, this is a great fund, but they do say, these are changes that need to be made to the board of directors. These are changes that need to be made that this guy should probably not be managing because he has.
Um, two different lawsuits against him from other funds that he was in. So they'll do background checks on some of the people that are operating the fund. Uh, and I find that very useful and I'll often talk to them personally just to make sure that they can answer my questions clearly and concisely and that they just know what they're doing and that they have a track record.
Uh, and again, okay, so back to the fees. Sometimes these fees just get insane, you guys. And I thought that like luxury RV park one was just a home run, but the guy wanted 25, 000 a month as a salary. And he was doing his normal job. So he had his normal job. He was a commercial real estate broker, but he wanted to start this RV park and wanted to put this fund together, but his salary was going to be 25, 000 a month.
So basically you're investing 50. He's going to take half of it every month. To for his salary. And I was just like, no way. Um, so a lot of times I won't invest in things unless they have skin in the game. So that to me is not having skin in the game. If he was going to invest, you know, 2 million of his own money and not take a salary until it made money.
Okay. Then, you know, cool. Then I think my, my clients would be covered because it's your cash. You should be getting something for it. They're not really taking any risk. I mean, the only risk that they've, they've taken is. lawyers to come up with these documents and then get a sales team. So I don't think anybody really goes into it very lightly.
But at the same time, they build in a lot of these fees. So you could have like an acquisition fee, a lot of times you'll see those where they're going and like, They're going to find, um, the properties, so there's an acquisition fee and, uh, there's just fee after fee after fee and you just want to make sure that you understand what each one of those are for and that they're not overlapping, because a lot of times they'll make enough in those fees to make it worthwhile for them to have the fund.
And then they can make money on the end, like what I was saying, the 80 20 after you're made whole, because they're making so many thousands of dollars on these fees, just for finding it as if they would selling it to anybody else, right? Just like you, you, the fund are their client buying this piece of property.
And so they would make a fee or a commission off of that, just, you know, like they would in every day. But then when they build in other fees on top of that, that's where I really start to question it because why isn't it? No, let's make the building make some money and then you could make off the off the other end of it.
Then you'll make the 20 percent or 30 percent or whatever you've got built in there. So that's kind of my litmus test. Um, I really haven't invested in deals other than that, unless they've got money and skin in the game. Uh, I've invested in another one where they had a lot of friends and family in it. I mean, like when I first invested with this hotel group, it was, I honestly want to say it was like 30 or 40 percent of friends and family.
And to me, you're, you know, you got your own money in, but you also got your moms and your uncles and you know, those types of things. You got those, you're not going to let that go south. So, as I said at the beginning, you know, these people could fundraise and then skip town. And so, but if they've got their own money in.
Uh, then, you know, I know that they've got skin in the game and they're more likely to make it work. Um, the other thing that I watch out for is, are they allowed to purchase, uh, real estate outside of the fund? And how does that work? Is it just good faith? Is it, um, that the fund is their number one priority and then this other job is, you know, or they're working for other people that also needs to be disclosed because they could find an amazing property and go, Oh, I'm just going to do this myself and I'm not going to put it in the fund.
So you see how there could be, um, uh, there could be some, um, conflicts of interest there. And that's exactly what that's called, uh, is when you're reading this disclosure documents, it will say what their conflicts of interest are and if they can purchase outside. And usually there are, um, which is why I like to talk to the fund manager and see what they've got going on.
Um, I think that is about. It on the details of these alternative investments. As I said, um, a lot of these come across my desk. I read a ton of them. Um, and a lot of times what I'll do is I'll get the due diligence reports, and if you guys are interested in doing these and you are looking at the websites online, I just really urge you to again, do your due diligence and, and look at it and talk to someone.
And learn, it might be just a great way to learn. And the only way you really learn is by doing these. My clients love these alternative investments. Um, they're always like, man, we should have done more of these. We should have done sooner. Uh, and a lot of times we'll just get started with one at 50, 000 so that they can see what it's like.
I think the good funds, they'll do newsletters. They will let you know what's going on with all the different properties, they'll take pictures, uh, they'll send different email updates every quarter, every six months, it depends on how busy they are. I mean, there are funds where you are building the buildings.
So obviously that is a very long lead time. I mean, cause they raise the money and then they're going out and buying the land. And then they've got to get all the permits and then they have to build, you know, so it is many years until people can start moving into those apartments or to those long term care facilities.
And that is kind of boring for some people. And I don't recommend that you do those for your very first ones, because you're going to want more feedback. You're going to want to see. See some more things. That's why some of these hotels and some of the commercial buildings that have leases are better because people are paying their rents.
People are paying to stay at the rooms, and so then you are making your dividends and interest based on what those properties are bringing in, and they have a lot more going on for their newsletters for you to see what's going on. So you really are investing in a business and you're investing with this person.
Uh, and you just need to make sure that they have a track record, that you trust them, uh, maybe they're a referral from another friend, uh, although I don't know about that. I, I know some people that got burned big, big, big time by just doing the referral from another friend thing. Uh, you really do need to know what you're, what's happening.
And, and, And honestly, I say no to deals just because it doesn't feel right. Like there have been so many that I'm like, man, this just like looks right. And it just doesn't, it just doesn't feel right. There's something off or they're not getting paid enough. So let me give an example.
I know I'm kind of going on about this, but let me give an example about this hard money lending has been, I have had people knocking down my door the last six months about hard money lending.
And that basically, that means take your cash. And let's loan it out to these people flipping houses and they're doing it in like Oklahoma and Alabama and all these places where you can find cheap housing still, there is one where you're going to put your money into a fund and then people make eight to 11%.
So you put it in the fund then owns the house. The other one is where you actually lend on an actual house in your name or the name of your trust would be on the actual documents that are at the title company, you know, the loan docs, you are the lender, you're the bank, those you're making, um, you know, nine to 11%.
So you're over here and you've got a fund where you're making eight to 11, or you've got your name on a house.
I'm going with the name on the house, the hard money lending, even though it is a little bit harder because you have to go to the bank and actually wire the money and you need to review the house. If you wanted to, obviously you would when you were first doing it, but you'd probably get to trust people as time went on.
But I would definitely recommend this hard money one versus this other hard money fund. Because you're going to make the same amount, but you're actually having your name on the house. So if something goes wrong, then you foreclose on the house and you own the actual house versus the fund. If something goes wrong, then you're still making your eight to 11.
But what if something goes wrong, like in the whole country? Then, you know, the fund could seize up and you could just be sitting there waiting, hoping that these people are managing it correctly and hoping that they know how to manage it correctly. And so for me, it was just much more simpler to go with the straight hard money lending versus going with the fund, because you're not, you're not You're not making more for the extra risk that you're taking of having that extra person in the middle and putting your trust in them, putting, you know, putting all your, uh, you know what I'm trying to say.
Uh, and I, you know, I wish I was better at this podcast. Like I, I have a hard time coming up with those words. It's like, I can see it in a picture, but I don't know the word for it. And you would think with, starting a podcast. That'd be something I'd be good at. And I'm so amazed at some of these guests and I'm like, God, you just know how to put things into words so well.
That's why I love Brené Brown. She puts like, I'll say like five sentences and she'll put it in like three words. Uh, anyway, total caveat there. Um, and so the hard money lending, I just think, you know, those are the types of things that that's why I turn it down. I turned down another one where it was just, it was registered in the Bahamas and I was like, mm.
No, I'm not going with anything that was registered in the Bahamas and it ended up being like a Ponzi scheme. Uh, there were other ones that I, I just didn't feel good about when I was talking to them. And it ended up that a year later, some policy, some government policy changes and that one blew up too.
So you really do need to be careful of where you're going to invest. And I honestly, I would never really recommend investing in one building unless it was like debt. And they had. It was in a great part of town and you knew the part of town. I have seen a lot of people put their money in and these random commercial buildings.
And I kid you not, 15 years later, they are still stuck in this thing waiting for someone to sell or do something. Because when you get into these alternative investments, you do not have voting power. You do not have, like you could all get together and sue them. Sure. But you are what's called a limited partner.
The general partner is the one that's that makes all of the decisions you sign off on. I am not here to make daily decisions. You know, you are simply an investor and you believe in what they are selling and what their strategy is, but you are a limited investor. And so you do not have any say in the day to day.
So that kind of becomes a problem right when it comes down to like even COVID and these things are going on for a long time. And I mean, I got one fund of hotels and I'm like, just start selling, sell a damn hotel. Will you please sell a hotel? They will not sell any of the hotels because they want to.
Keep it as a whole and then sell it to like Wall Street as a one big package. Uh, and so do I trust them that they're making the right decision? I don't know. I call them every three months and make sure that, um, everything is okay and uh, you know, so sometimes these things can go sideways 'cause things like Covid happens.
Um, so I think that's about it.
I don't want to drone on too much about all of this, but I love alternative investments. You guys. I think if you have the ability to get into them. in any way, shape or form, I really believe in investing outside of the stock market and not having all of your money there. I think it's, um, you know, whether you're doing it, um, like what we've talked about in some of these other, uh, episodes about doing it with some like whole life insurance and so that you can then borrow from it and go invest in something else, uh, or you're doing these alternative investments.
I do think that it makes it more fun and more interesting and you can read newsletters and You know, kind of learn about another topic, you know, something that you don't really know about. Um, and my clients all love them and think that they're super interesting. Um, so let me know if you have any questions.
I hope that I could break this down and I didn't confuse you too much. And honestly, I just hope to inspire your financial life a little bit and, um, talk to all you guys. I appreciate the feedback that you guys have all given me about the show and I'm really enjoying it. So thank you so much for listening and I hope you guys have a great day.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.