The ultra-rich rarely manage their own money; they employ a “family office” to handle their investments. And those family offices (along with lots of hedge funds and university endowments) have long put big chunks of their money into “alternative investments” – things like Real Estate, Private Equity, Commercial Debt, and Venture Capital – both to diversify as well as to add the potential of big gains from things like successful VC exits Fortunately, access to alternatives for investors of rather-more-modest means has exploded in recent years, riding the wave of Fintech startups and several key regulatory changes that came as part of the JOBS Act, so now it’s easier than ever to start investing like a millionaire by adding alternative assets to your portfolio starting with $1,000 or less.
Here’s three interesting ways to get into alternative investments like Real Estate and Venture Capital and start investing like a millionaire with just $1,000 or less. (I have invested at least that much in each of these three platforms – I won’t recommend something I don’t use myself! Note some of the links below are affiliate links.)
1. Peer-to-Peer Lending: Lending Robot
When I first started out with P2P lending about two year ago, I invested directly with Lending Club, the poster child for the sector. A lot has changed since then, including the departure under fire of the founder and CEO, and I haven’t put any more money into Lending Club. The other major player here, Prosper, has had its own challenges, but I’m still bullish on the concept of mediated peer-to-peer lending, and at least for now, the returns to me are worth the risk of sensibly investing a modest amount.
With both Prosper and Lending Club, personal and business loans of up to $40,000 are split up into $25 pieces and sold off to investors. Both also offer rich data about each loan and borrower, tools to filter for your risk preferences, and data about historical performance. But since I’m lazy, I was thrilled to find Lending Robot, a service that automates and tracks investments across both platforms with nifty (and simple) tools for monitoring performance and adjusting your strategy.
With $1,000, you’re diversifying across 40 different loans, which goes a long way toward minimizing the risk of any particular loan defaulting (Lending Robot has a great blog, including this post analyzing the ideal number of loans for effective diversification – tl;dr is that you can get maximum diversification once you hit about $1,500).
Lending Robot takes a healthy cut for their service (0.45% of the investment you manage through them), but only above the first $5,000, so if you’re starting with $1,000, it’s free. (And if you join with this link, they’ll bump the free amount they’ll manage to $10,000.)
2. Real Estate: Fundrise (and now Rich Uncles and RealtyMogul)
Peer to peer lending gets a lot of the press, but there’s an incredibly vibrant fintech ecosystem around real estate. For HGTV junkies and would-be flippers, there’s plenty of ways to directly fund specific rehab projects without breaking a sweat (using sites like Fund That Flip and Patch of Land), but with minimums in the $1,000-$5,000+ range, you need a lot of capital to effectively diversify – or else one renovation gone wrong will kill your returns.
Enter Fundrise, which also started out offering direct investments in specific properties, but has since shifted strategy toward what they call “eREITs” (“REIT” is short for “Real Estate Investment Trust”). Right now they have two investment options: The “Income eREIT” is oriented toward generating income by investing in debt that funds residential and commercial real state projects; the “Growth eREIT” mixes debt and equity, so the returns will be more variable, but there’s more potential upside. With both choices your money is invested across multiple properties, reducing the risk if any single project is delayed or defaults. Dividend payments are made quarterly.
More recently, Fundrise has added more eREITs as well as a new category of “eFunds” that focus on residential properties (the REITs are limited to commercial properties), but now investors cannot choose specifically which of the funds and REITs to invest in, and instead are funneled through a robo-advisor-style interface to determine an allocation (and are charged a fee for the service).
Most of the crowdfunding sites also only serve “accredited investors” (more on that below), but Fundrise is open to anyone with $1,000 to invest. Since this post was first published, several other real estate crowdfunding investment platforms have brought similar offerings to market. The most similar to Fundrise with REITs open to all investors are RealtyMogul and Rich Uncles. Another new platform, StREITwise, implies an offering coming soon, but that’s still not available. Other platforms with real estate offerings open to non-accredited investors for $1,000 or less include American Home Preservation, and Groundfloor (both Groundfloor and Rich Uncles are currently limited to certain states). I have not yet invested in any of the above platforms except for Fundrise.
3. Venture Capital: Hedgeable (and now Regulation Crowdfunding)
Another booming fintech sector is so-called “Robo Advisors” which use various algorithms and automation to allocate and rebalance investments as a low-cost alternative to high-fee managed mutual funds, but for those (like me!) without the patience or inclination to construct and manage a portfolio of dozens of low-cost ETFs and index funds.
Hedgeable costs more than competitors like Betterment (which I also use for an IRA and would certainly recommend), but has one feature in particular that sets it apart and offers an outstanding value if you want to dip your toes into Venture Capital.
For now, that Hedgeable feature is only open to what the SEC calls “accredited investors”. (You can read more in our glossary, but the most common way to qualify is if you earned $200K or more in each of the last two years, or $300K together with your spouse.) Although that’s certainly not small change, given salaries in expensive coastal cities like Boston, New York, or San Francisco, it puts a lot of interesting investment options within reach for quite a few professionals (see this useful post from Financial Samurai showing how quickly housing and child care can eat up a “normal” six-figure salary in San Francisco).
Once you confirm your accredited status with Hedgeable, you have access to their in-house Venture Fund, which itself invests in other funds through services like AngelList, Funders Club, and OurCrowd. So why bother going through Hedgeable? Well, the funds they invest in typically have minimums of at least $10,000 each. So with Hedgeable, for $1,000 (or less) you’re investing in dozens of startups and getting the kind of diversification that would otherwise cost you $30,000 or more. (Obviously that also means a corresponding smaller return given the smaller investment, but as a way to get your feet wet it’s hard to beat.)
(Since this post was initially written, several dozen new investment crowdfunding portals have also come on line, many offering investments in startups that are open to anyone to invest in, and for as little as $10 each. The Hedgeable fund gets you exposure to more than 200 different companies – something quite challenging to do on your own for under $1,000. Nevertheless, new options abound for investing like a millionaire for $1,000 or less. See 5 of the Best Equity Crowdfunding Sites for Beginning Investors for more on getting started with Reg CF investing.)
This is a fantastic time to be an amateur investor, but of course YMMV (your mileage may vary). I’m a big fan of placing lots of small bets as a way to both diversify risk and to maximize learning, and before you put your hard-earned money into any of the above alternative investments, keep the following in mind:
- Don’t risk what you can’t afford to lose, especially when you’re just starting out.
- If you have any consumer credit debt (credit card, auto loan) you should pay that off before putting any money into alternative investments.
- These are all relatively illiquid investments, which means that if you’re going to need that $1,000 anytime soon, put it in the bank instead.
- Risk and reward fall on a spectrum: you won’t hit a home run with P2P loans, but you’ll earn cash interest payments every month, which is fun. On the other hand, with a venture investment you’re unlikely to see any of your money for years (if ever), but there’s at least a small chance that one of those investments will be the next Facebook.