As interest rates stay persistently high, with the Federal Reserve adopting a hands-off approach in the face of stubborn inflation, many real estate investors are trying to think outside the box to turn a profit.
Year-round vacation homes have proven lucrative in this regard, earning over three times as much as a regular rental. But competition is tight, and relying on a full calendar of guests can be stressful.
Fortunately, other, less-known real estate assets can also turn a tidy profit when done correctly. Let’s take a look at a few of them.
Wineries
Investing in a winery isn’t just for rock stars, hedge funders, or tech tycoons—and they aren’t limited to California’s Napa Valley. Granted, of the more than 800 million gallons of wine produced annually in the United States, California produces 84%. However, quality wine also comes from New York, Pennsylvania, Virginia, Maryland, and Oregon. Wine, of course, is also produced in large quantities in the Mediterranean and around the world.
Buying an operating, functional winery is not cheap and not for the novice. If you hope to learn on the job, no credible winery will sell to a newbie. Rather, they will want to see that you are connected and known in the business.
If you want to buy in Napa, being involved in associations such as Sonoma Valley Vintners & Growers or Napa Valley Vintners Association and being on good terms with other winery owners is a huge help. These connections can take years to build, so partnering with someone who has them and knows the wine business is the way to go.
What it costs
As you can imagine, the cost of buying a winery spans the gamut from several hundred thousand to several million dollars, depending on size, location, and profitability. Assuming you are not a vineyard expert and want to purchase an ongoing, operating vineyard, expect to pay $35,000 an acre. Considering you need about 20 acres of land for a profitable vineyard, you’re looking at a $700,000 investment at the bare minimum.
If it is operational, the vineyard should already have the machinery on site. You should be able to work out a deal with the seller. If you have to buy equipment from scratch, expect to spend at least $200,000. Overall, expect to make $80,000 to $100,000 in profit on average per year.
A larger winery can increase profits by hosting wine-tasting events, wine classes, estate tours, bachelor and bachelorette parties, food and wine sales, and pick-up and delivery sales. It can also double as a bed and breakfast, charging a premium for guests to stay on-site.
Ski Resorts and Vacation Homes
Investing in a ski resort town has been a hot topic in the BiggerPockets forums. The advantages are obvious—high income during the ski season and income from hikers and outdoor enthusiasts in the summer. On-site management and booking also take away the stress of being hands-on.
However, investing in chalets and lodges in upscale ski resorts can be expensive. Deep-pocketed Wall Street types and tech moguls (in September, Netflix co-founder Reed Hastings invested $100 million in Utah’s Powder Mountain) have been shelling out big bucks, which would infer that on the macro level at least, ski resorts are a good investment. Adding a helicopter landing area ensures high rollers can fly in on a whim and spend big money for the privilege.
On the micro side, there are nuances. If you are not well-heeled and can’t envision buying a ski home in Colorado or Lake Tahoe, there are plenty of other opportunities in Maine, Pennsylvania, New Hampshire, Oregon, and Vermont. This New York Times article shows some of the country’s highest cap rates for ski vacation rentals are in Oregon and Pennsylvania, where median home purchase prices are under $300,000.
Driving Ranges
You’ve probably passed modern golf driving ranges like Topgolf, PopStroke, and Drive Shack on the highway. They are huge, monolithic encampments reaching into the sky, with netted enclosures and neon lettering on vast concrete walls.
Unlike a regular golf course, a driving range is not weather-dependent. All players drive balls from a covered enclosure, complete with food service and scores displayed on a digital screen like a bowling alley.
Investing in one of these setups works like a real estate syndication, with start-up and operating costs running into the millions. However, these are on an upward trajectory in terms of estimated profit. Last year, 32.9 million people engaged in off-course experiences, a 41% increase since 2019. This number in 2022 and 2023 exceeded the number of on-course golfers.
Once built, the centers are revenue machines from golf membership fees and food and drink sales, and they are year-round destinations for serious golfers, casual players, and party crowds alike.
Franchising
A Topgolf franchise costs an average investment of $18 million, which includes construction. Each venue typically generates about $17 million in annual revenue, as of 2021 figures.
The advantage of such a franchise over conventional real estate investing is that there are no tenants to deal with. Instead, there is an ongoing stream of new visitors each day. The disadvantage is that once built, the management of these sites is labor-intensive.
A cost-effective approach
Buying cheap land and building a conventional grass driving range is a far less expensive approach. Sure, there would be no food and drink service or pumping pop music, but the start-up costs would also be low.
Overseas Vacation Homes
Buying a vacation home in Central America, Europe, or the Caribbean and marketing it to U.S. visitors could be a big win, considering the low purchase price. However, management and cleaning services could be a stumbling block if you don’t connect with a reputable agent.
On the positive side, an overseas investment means it is protected from domestic U.S. courts and liens and provides a great second home and eventual retirement location. Overall, a strong dollar, high U.S. home prices, and interest rates have seen an influx of U.S. buyers looking overseas.
International Living specializes in finding homes for U.S. residents looking to invest and/or retire overseas. Its recent report cited the top five places in the world to buy real estate in 2024 when factoring in the climate, income potential, and stability of the country:
- Los Cabos, Mexico
- Caminha, Portugal
- Riviera Maya, Mexico
- Estepona, Spain
- Rocha, Uruguay
Farmland
Food is a necessity that will always stay in demand. It’s no surprise that Bill Gates is the largest private farmland owner in the U.S.
Farmland can be invested in through REITs or privately with direct investments, either by owning and cultivating the farm, leasing it to a farmer, or partnering with an operating farmer.
You can buy farmland through a land auction, but not any piece of land will do. Some serious research is needed. According to the USDA, the average farm size in 2022 was 446 acres, and the reported average value of the land was $3,800 per acre, meaning an initial investment of nearly $1.7 million for an average-sized farm.
There are also farmland syndication and crowdfunding platforms, such as American Farm Investors, AcreTrader, FarmFundr, FarmTogether, and Harvest Returns. According to numbers quoted by AcreTrader, over the last 20 years, U.S. farmland has offered average returns of 12.75%. At this rate, $10,000 invested in farmland in 2002 would now be worth over $105,904. Farmland returns comprise two values: land appreciation and property capitalization rates.
Final Thoughts
Unless you’re sitting on a 4% or lower interest rate, if you plan to invest in real estate and cannot afford to buy with cash, you will be forced to think creatively about the best way to leverage your money. The best return on your money is often generated by adding a service component to the real estate asset.
A short-term rental is basically running a hotel—cleaning units; adding amenities such as kitchen supplies, fresh towels, and toilet rolls; and taking care of all utilities. With driving ranges, the management involves facilitating the games, supplying equipment, and catering. And with wineries, it is taste-testing, selling wine, and offering accommodations. This is where the additional markup and profit are made.
The advantage of many of these businesses is that you can partner with an expert in these businesses for a passive investment, increasing service charges and thus profitability over time.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
