Investing for Income? Consider These 4 Alternative Investments

To keep your money working hard it often pays to review your strategies and adjust your weighting according to any target date that you have in mind.

Alternative investments continue to grow in popularity as people with cash pension pots and those looking to diversify with some of their money, seek out new and hopefully profitable venues for their cash.

If you are looking at alternative investments and want to generate an income, the question is which type of alternative investment offers the opportunity for income?

Money grows from trees

The old adage of money growing on trees can be comfortably adapted to reflect that money can actually grow from trees, as forestry investments are proving to be a good income generator.

There is an opportunity for investors to achieve very acceptable returns from woodland and forestry funds and forestry investments overall, have averaged 8% ROI per year for the past two decades, according to figures available from the UK Forestry Index. (See also why wealthy Americans are buying up trees.)

If you are looking for a good source of investment income from an alternative investment, the returns from forestry seem to more than acceptable, with some years over the last decade producing annual returns of over 30% and nothing lower than 7% according to the IPD Forestry Index.

Another plus point is that depending on your country of residency and tax status, you may be able to claim certain tax exemptions and tax relief. Although you should always take professional tax advice.

See our top 10 tax saving tips

When you are investing for income, you want to ideally try to find an investment that offers limited volatility and steady returns, and woodlands are an alternative investment that fits that profile.

The inheritance tax angle also appeals to a number of investors and this seems to be an investment that keeps on delivering in terms of capital growth and annual returns.

There are always pros and cons to any investment opportunity and despite the obvious attractions of an alternative investment such as woodlands, buyers should be wary of potential maintenance costs, which have the capacity to eat into your margins and reduce your tax benefits.

You will need to budget for a cost of about $2,250 per year in maintenance and pruning costs for every five acres of trees plus an amount for annual insurance.

Investing in woodland is a numbers game in many respects and if you want to buy a commercially viable woodland that is growing spruce that is going to be farmed in 20 years time, you can expect to pay $1.5m or more.

The other option is to look at investing in a forestry fund. A lot of these alternative investments require a substantial minimum investment and you should also be aware that collective woodland schemes are not regulated by the Financial Conduct Authority, so there is limited protection if the investment goes wrong.

Returns from forestry have shown to be respectable rather than stellar, but an annualized 7.7% return since 1992, certainly ticks some boxes if you are looking to find an alternative investment that offers you an income.

Income from ground rents

Another alternative investment that has the capacity to offer steady annual returns is investing in ground rents.

There are some income funds that give you the chance to do this, with average yields likely to be in the region of 4% but the added attraction that from an income profile perspective, that returns can grow in line with inflation, as some funds have its assets pinned to the Retail Price Index, so you get increases in the ground rents to keep pace with inflation.

Ground rents are the annual payments that have to be paid by the leaseholder of a building to the owner of the freehold. The key selling point of investing in a fund that collects ground rents is that the credit quality is high, due to the fact that any default on ground rent payments could result in repossession of the property, which many tenants would not want to risk.

Income from ground rents therefore offers you the chance to achieve a long-term visible and secure income stream. The obvious downside to this seemingly attractive scenario, is that this is a sector which is unregulated and illiquid, so the strong advice is to always be aware of the inherent risks and seek out an appropriately managed fund that is collecting these ground rents.

Infrastructure and asset leasing

Investing for income often means trying to find something that is able to offer steady returns with relatively low volatility and another alternative that fits that criteria is investing in infrastructure and asset leasing.

Investing in income-generating assets like infrastructure and asset leasing has the potential to deliver steady returns over the life of the lease and a Multi Asset Income Fund can prove to be a low volatility environment with good income potential, but again you need to get proper advice before investing in one.

Property alternatives

There are alternative investment funds which make investments in what are classed as property alternatives and will typically be a hotel, shopping center, cinema, private healthcare facility, gyms and even student housing.

Property alternatives can also be investments in properties that are situated in regeneration areas and can be viewed as entrepreneurial property investing.

The common denominator amongst most of the property alternatives funds on offer is the fact that tenant leases tend to be for at least 20 years or more, so you are likely to enjoy a good duration of income.

Another attractive point is the fact that these specialists assets tend to offer a higher yield that traditional prime retail, office and industrial sectors.

Property related to the healthcare sector for example, is currently offering yields of around 5.75%, which compares favorably to that perceived safe-haven of gilts which is presently offering around 3% per annum over a ten year period.

Other alternative investments like wine and fine art to name a few, have performed admirably over the last ten years in terms of returns, but when it comes to investing specifically for income, trees, infrastructure, ground rents and property alternatives do seem to offer the potential for steady annual returns.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.