For the uninitiated, who are angel investors and why do they fund?

An angel investor is generally a high net worth individual who invests their own money in start-ups or other types of businesses. They are independently wealthy both by inheritance and excellent business returns. They put up capital to help get a business off the ground, which is just about coming up, by calculating and forecasting the success potential of the same.

In return for their funding, they typically become part owners and shareholders in the business. Depending on the individual or the sector, the funding can be purely passive wherein the individual is not involved in how the company is run and quietly earn off the returns from the company equity. The portion of ownership is typically determined by the amount of funding and the associated risks with the business line.

Okay! so you are an angel investor. 

You love the adrenaline rush with much of your day resonating with the  “high risk, high returns” mantra. The one thing that immediately pops up whenever someone breathes angel funding is – start-ups – disruptive technology, game-changing products, unfathomed services to take on the world. Add to this frenzy of excitement the exit successes of Instagram bought by Facebook, Trivago by Expedia yielding astronomically high returns. 

This phenomenon led to a mad rush amongst newer angels to the riskiest class of asset – the IT and services industry-based start-ups.

As with every business investment, there are bound to be upsides and flipsides. So what can an angel investor do to protect its wealth – Balance with a holistic portfolio!

 Let’s explore how.

 There is rising popularity in real-estate being added to investment portfolios in order to mitigate risk amongst angels investors. When one explores real estate that arena does have its fair share of risky avenues, but one can look at medium risk options like residential, commercial real estate, land, associated heavy equipment that offer a rolling return. A built-in income from the tangible asset of real estate makes it partly safer, in case of other business lines tanking. The angel can exit with part or at times complete fund recovery. Depending on the asset class, investors may also have the benefits of steady cash flow. This kind of fall-back option is very important when compared with a let’s say a start-up which if unfortunately does not kick-off, the whole funding becomes non-recoverable. One might be tempted to say –  the riskier it is the better the return. Agreed, however, your funds are not inexhaustible and these pandemic circumstances have brought this truth closer home with huge upheavals in the macro-economic situations across the globe.

The safety rope of liquidation option is very assuring to investors as it keeps the boat afloat in hard times.

Depreciation is another factor that helps further reduce the risk exposure. Depending on the market of operation certain countries legally allow investors to claim tax benefits on real estate income or defer tax payments from the same. When the proceeds of the liquidation are reinvested in similar asset families, the capital gain taxes can also be deferred or reduced. The ticket size will determine the float gains, which can be sizeable. When seamless investment and liquidation are executed with an eye for detail, the portfolio can grow smoothly and capital gain taxes can be erased over a long period.

Let’s look at the stability side now.

The real estate market is less vulnerable to market fluctuations than stocks, bonds, or other securities. During adverse and uncertain economic times, this provides you with some protection as an investor. Stocks can crash, start-ups may not take off but an investor who owns a property rented to multiple tenants will continue to generate rental income irrespective of market fluctuations. 

This cash flow can then be reinvested in high-risk assets like start-ups as they are not coming directly from principal, saved money.

This will add much-needed stability and security to your portfolio balancing the risky with the illiquid but income-generating asset.

For the hardcore high-risk appetite investor, there will always remain the avenue of investing in an opportunistic development deal in a non-prime location. The safety net remains that investing in real estate will give access to physical, tangible assets. 

Now before taking the plunge, angel investors should closely evaluate the different kinds of real estate options – commercial, residential – multi-housing or single-family, retail, industrial, etc. After selecting a property class, the amount of fund allocation will be basis the risk preference suited to the individual.

Overall, real estate investment is a win-win for angels looking at steady returns with relatively lower risks. It is less demanding on one’s time and involvement, also profitable even for passive investors.