5 ideas on building wealth outside the stock market

Diversifying your investment portfolio is a classic recommendation from financial advisors for a number of reasons. Diversifying allows you to hedge against certain market risks, and introduces opportunities for more significant returns in the long run. In essence, even if certain aspects of your portfolio might be underperforming, others still have the chance to perform.

Most people think of the stock market first when they hear the word investment, however there are many other ways to put your money to work for you.

Here are five ideas to help build wealth outside the stock market.

1. Investing in a rental property

People will always need a place to live and positioning yourself to be a supplier of housing can be a smart investment. Moreover, given that the value of real estate tends to rise over time, your rental properties may increase in value even as tenants are paying you to occupy them.

This means a steady source of passive income, on top of appreciation.

There are tax advantages to being a landlord as well. Creating an LLC for your holdings can provide business deductions. You can deduct the costs of property insurance, taxes and certain types of repairs from your taxes. Depreciation and mortgage interest can also garner you tax breaks.

Granted, there are some downsides as well. These include the tasks associated with managing the properties, such as advertising and showing vacancies, vetting would-be tenants and evicting non-paying individuals. There are also certain legal concerns against which you must be careful to indemnify yourself. You must also maintain your properties in order to keep your tenants safe and maximize the income potential of your holdings.

Still, even with these potential detriments, when it comes to ways to build wealth, rental property investments have been the foundation of many a family fortune.

2. Real Estate Investment Trusts (REITs)

A clever variation on the concept above, buying into an REIT gives you the ability to become a real estate investor without many of the obligations listed above. Moreover, joining a real estate investment trust can get you into commercial real estate with a much smaller commitment of capital than buying an office building or a shopping center outright.

The upsides include diversification within this investment, as your capital is spread over a range of properties, as opposed to being tied up in just one. REITs are required by law to pay 90 percent of their income in dividends, which can mean a steady stream of passive income, even as your investment grows in value. REITs are also exempt from corporate tax, which means larger dividends for investors. REIT shares are also tangible, in that they are tied to something you can see and visit. Even better, they are also fairly liquid, as you can sell them quite readily. You’re also freed of the day-to-day inconveniences of owning real estate as a management company handles all associated issues.

On the other hand, you will face income taxes on those steady dividend checks and they can be taxed at the same rate as ordinary income. There’s also a degree of volatility tied to the movements of interest rates. REIT stocks cost more when interest rates rise. And, because they’re inversely linked to the Treasury yield, REIT values fall when the Treasury yield rises.

You’ll also find yourself exposed to broader market trends. For example, COVID-19 lockdowns brought about an increase in remote work and showed companies having office space wasn’t as much of a need as they’d previously believed it to be. As a result, the market for office space has contracted and so too has the value of REITs tied specifically to this type of property.

Still though, REITs can be a robust addition to an investment portfolio.

3. Buy Into a Franchise

There is a great deal of value to be derived from doing business under an established and well-respected name. You’ll also bypass many of the growing pains associated with being a startup. After all, the business model is already established and all you have to do is adhere to it.

Other benefits of the franchising include the name recognition your business will derive when it’s a McDonalds, UPS Store, Pearle Vision or ACE Hardware. These brands are well known to most Americans and trusted as well. Much of this is owed to the huge national marketing and advertising budgets these companies command — huge budgets that will be working on your behalf. You’ll also gain access to the buying power of these companies, making your costs of goods lower. Banks will usually fund these businesses as well, they’ve proven to make money. Even better, the Small Business Administration has money specifically earmarked for people who want to buy franchises.

Of course, along with the uniformity of a franchise comes the forfeiture of autonomy. You’ll have to work according to the franchise playbook. This is true even if you come up with a better way of doing something and the parent company decides it’s not an approach it wants to take. You could also find yourself in very hot water if you’re deemed to be violating your contractual agreements.

You’ll have to come up with a pretty hefty sum to buy into one of the leading franchises as well. In fact, franchise fees can often be more capital consuming than starting a business from scratch — and you’ll keep paying after you’ve joined the organization. Royalty fees are an ongoing cost, as are marketing and advertising fees. And finally, if the brand catches a cold, you could come down with the flu. Any scandal involving the parent organization could have a detrimental effect on your ability to do business.

With all of that said, noteworthy individuals like Shaquille O’Neal do quite well in franchises.

4. Peer-to-Peer Lending

There was a time in which the only way to get loans were from established financial institutions or family and friends. The advent of the internet brought with it another method of securing funding; peer-to-peer lending. You may have also heard it referred to as social lending, crowd lending and crowdfunding. Borrowers can either submit loan requests or browse websites looking for lenders willing to fund their projects.

These loans typically deliver higher rates of return than deposit accounts and bonds. You have the ability to vet the borrowers with which you choose to work, so you can minimize the risk to which you’re exposed. Many of the hosting sites also offer contingency funds, should a borrower default.

On the other hand, the SEC does not regulate this aspect of the financial industry, so you have to choose your investments very carefully. There’s no government agency backstopping a failure. A nascent industry, the track record of P2P lending is still being established. Thus, it’s hard to predict how a recession would affect this asset class. Keep in mind; these are unsecured loans, which means borrowers face little more than damage to their reputations if they default.

5. Alternative Investments

Granted, everything on this list actually qualifies as alternative investment ideas. However, in this case, we’re referring to a curated selection of investment opportunities that were previously only available to institutions and the ultra-wealthy.

Willow Wealth’s alternative investment offerings can leverage numerous asset classes such as Real Estate, Legal Finance, and Art Finance as well as Commercial and Consumer Finance. Even better, you can tailor the nature of your Willow Wealth investment to your specific situation, whether you’re looking to generate income, grow your overall portfolio value, or some combination of both.

When considered among the five ideas for building wealth outside the stock market listed here, Willow Wealth offers professionally managed investment opportunities with low correlation to the broader markets.

What’s more, you can get started with Willow Wealth today with an investment as low as $5,000 for your first investment (subject to certain exceptions).

Not sure where to start? One way is to explore Willow Wealth’s online marketplace. We give accredited investors access to alternative investments that traditionally have been unavailable outside of institutional investors and hedge funds.