5 Investments That Offer Low Risk and High Returns (and Why They Work)
Written by
G. Brian Davis
Edited by
Rebekah Evans
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Most investors think of risk and returns one-dimensionally, as a line: as returns get higher, so does risk in lockstep.
More sophisticated investors understand that investments actually have many dimensions. Beyond risk and returns, other dimensions include liquidity, time commitment, minimum investment, required expertise, personal values, tax advantages and more.
For example, I’ve seen plenty of high-return, low-risk investments — that require a $50,000 minimum investment. I’ve also seen many with no liquidity and a five-year time commitment.
Once you break out of the mindset that high returns always come with high risk, you can start asking, “Can I live with these other trade-offs, in exchange for the high returns and low risk?”
Start thinking more multidimensionally about investing, as you explore these investments that sometimes offer “asymmetric returns.”
Oil and Gas
“Investors can reduce their overall portfolio risk and earn high returns with alternative investments like oil and gas,” said Jace Graham, CEO of alternative investment group Rising Phoenix Capital.
Commodities like oil and gas can serve as an excellent hedge against inflation. They have intrinsic value and buyers pay that value regardless of the currency denomination.
Of course, fossil fuels don’t align with many investors’ personal values. That dimension deters many investors, despite the potential for high returns and lower risk.
Graham has seen those high returns firsthand. “Over the last six years, our oil and natural gas funds have paid an average annual return of 16%,” he said. That falls in line with Reuters‘ reporting that oil and gas drilling has historically delivered returns in the 15 to 20% range.
Distressed Real Estate
Austin Glanzer, owner of Noble House Buyers, buys properties from distressed homeowners. “When the economy slows, foreclosure rates often rise, creating opportunities to buy properties at deep discounts,” Glanzer explained.
Imagine buying a $300,000 home for $200,000, putting $50,000 in renovations into it and selling it for $400,000. Mathematically, the returns are high and the risk is low. But again, these investments come with other dimensions beyond risk and return.
Buying distressed investment properties requires a high minimum investment and high skill. Most real estate investors who operate at this level do so as their full-time business.
That said, you don’t have to buy properties directly to invest in real estate for high returns and low risk.
Private Equity Real Estate Funds
Another type of investment is hands-off real estate investing with the intent of asymmetric returns.
For example, say an investment club invests in a private equity real estate fund that runs a land flipping business. They can flip a good amount of parcels each year, buying parcels for anywhere from $25,000 to $250,000 and aiming to sell them for 50 to 100% more than they paid.
There’s no construction risk in raw land, no property management risk, no risk of tenant defaults. The fund doesn’t use debt, so there’s no risk of rising interest rates ballooning their expenses. The greatest risk is that a deep recession hits and the demand for land eases up temporarily.
At the fund level, they earn net returns in the 30 to 35% range each year, after all their expenses. And they pay their investors 16% annualized distributions every quarter.
Real Estate Syndications
Funds aren’t the only way to invest passively in real estate.
Alternatively, you can invest for fractional ownership in a single property, known in the industry as a syndication. You get all the benefits of owning real estate — cash flow, appreciation, tax advantages — without the headaches of becoming a landlord.
“Alternative investments like real estate syndications, private partnerships and venture capital can provide better returns with lower risk than retail investing strategies,” explained Howard Lee Mosbacker, Ph.D and founder of investment platform Cyrannus.
Why? Because most investors don’t understand them. They also require a high minimum investment, have no liquidity and come with a time commitment of several years.
Secured Debt and Private Credit
I’ve invested in a private note secured by a personal guarantee, a corporate guarantee and a lien against a property worth more than double my investment. I earn 10% interest paid monthly and the borrower owns a real estate portfolio worth over $15 million with only around $8 million in debt.
As you can imagine, my interest payments arrive like clockwork on the first of each month.
Notes are not the only way to invest in private credit. You can also invest in debt funds and other credit investments. “Private credit investments boast lower volatility than stocks and bonds,” explained Chris Rawley, founder of agriculture investing platform Harvest Returns. “They also offer fixed income and a low correlation to public markets.”
And, of course, they come with other dimensions that don’t suit many investors. Often these investments have no liquidity, requiring investors to leave their money tied up for a fixed period. Some require a high minimum investment as well.
What are your priorities as an investor? Plenty of investments offer high returns and low or moderate risk. But those aren’t the only two dimensions of an investment and you need to understand the other dimensions before committing your hard-earned money.
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