What if you can uplift your community while making a profit? Doesn’t that sound interesting?
When you invest in a community, you support local initiatives in multiple ways. Community investing brings overall economic development to the area. It creates job opportunities and can improve local healthcare and education systems.
The investment enables you to solve your neighborhood problems while getting financial returns.
In this guide, you will learn how to invest in community to get good returns. However, before we get there, let us first define community investment.
Community Investment Definition
Community investing (or CI) refers to investing that supports the local community. It is a form of socially responsible investment that allows you to contribute to community development. The progress could be anything from providing affordable housing to healthcare to education.
You can make efforts to bring economic development to your specific community or any other society. Many involved in community investing also strive to help underprivileged people.
Several CDFIs (Community Development Financial Institutions) in the United States support impact investing. These institutions offer funds to low-income communities. They offer business loans, personal credit, real estate development financing, and more.
Community investment is a great method of providing capital to low-income communities. It is feasible with the aid of financial intermediaries and investment products.
The practice of community investment has grown in popularity worldwide. The credit goes to organizations like United Nations PRI (Principles for Responsible Investment).
Now that you have an idea of what community investment is, let us learn how it works.
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How Does Community Investing Work?
The popularity of community investing has risen dramatically over the years. In the US, more than 3,500 financial institutes promise to push their portfolios toward investments with ESG factors.
Community investing uses your investments to create opportunities and resources for underprivileged people. These people are underserved by conventional financial institutions.
Community investment assists individuals in meeting several community needs and supporting local development. High-impact community investing might not be the best way to grow your wealth, but it helps you diversify your portfolio.
Community Investment Examples
Nowadays, there are plenty of ways you can make impact investments and positively contribute to your community. Let’s learn these options one by one.
1. Community Development Banks
In the United States, The U.S. Department of the Treasury certifies CDBs (Community Development Banks).
Community development banks are also known as community development financial institutions. They offer loans for the development of local communities across the United States.
These banks aim to boost economic development in low- to moderate-income neighborhoods. Generally, community development banks promote affordable housing, job opportunities, and a healthy community.
A community development bank is a viable choice. Especially, if you want an alternative to megabanks that fund factory farms, big oil, and other damaging industries. You can open your account in these banks so that they can lend to underprivileged communities for development.
The banks also offer loans to local businesses and individuals supporting community development.
Similar to traditional banks, CDBs get insurance from FDIC. However, they prefer to provide funds to low to moderate-income clients only. They actually provide 60% of community development loan funds to only low-income communities.
See Related: Socially Responsible Investing: How to Get Started and Best Funds to Buy
2. Community Investment Bonds
Community investment bonds are a social financing service. They help not-for-profit organizations fund initiatives that have a positive social impact.
Participating in community investment bonds is another way to be a part of the investor community. These bonds are interest-bearing bonds designed for small-scale investors.
Community Investment Bonds feature a fixed rate of return for a set period. As a result, you get a decent return on your investment while also supporting a good cause.
3. Agency Bonds
Agency bonds are another ideal way to invest in the community. The federal government department or government-sponsored enterprise provides security for these bonds.
Government entities that issue bonds help people get affordable housing. Some agency bonds are even exempt from local and state taxes. Moreover, these bonds have higher interest rates than U.S. Treasury bonds.
Like any other bonds, they have some interest rate risks. However, these risks are relatively less than conventional community investment methods.
Some agency bonds are available with fixed coupon rates, while others may have floating rates. Note that the interest rates for bonds with floating rates are periodically adjusted.
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4. Community Development Loan Funds
The community development loan fund is an ideal local impact investing option. These funds offer low-cost funding for economic development initiatives. These could be providing low-cost housing, opening a community hospital, etc.
These loan funds are insured. Therefore, they do protect individual investors with grant money and loss reserves.
5. Pooled Investment Portfolios
If you want to diversify your community investment, you can always choose pooled investment portfolios. These are funds in a portfolio from several individual investors. A pooled investment portfolio collects capital from individual investors and invests as one huge portfolio.
Some common examples of professionally managed pooled funds are exchange-traded funds, unit investment trusts, and hedge funds.
Investors benefit from economies of scale in pooled investment portfolios. After all, it allows them to lower trading costs per dollar invested. Moreover, investors can take advantage of opportunities available to big institutional investors.
You can look for a pooled investment portfolio that serves low-income areas within a community.
See Related: Best Community Investments to Leave a Positive Impact
6. Mutual Funds
Socially responsible mutual funds can be another good option for community investment. They hold securities in companies that stick to social, moral, and environmental beliefs.
Look for socially responsible mutual funds that allocate up to at least 10% of funds to community investing. By making contributions to the mutual fund community, you can contribute to supporting disadvantaged communities.
Note that federal financial agencies do not insure these mutual funds.
See Related: Best Vanguard ESG Funds | ETFs and Mutual Fund Options
7. Municipal Bond
To invest in the community, you can buy municipal bonds as well. A municipal bond, also known as a muni bond (or just muni), is issued by the municipality or local government.
In the United States, bondholders often get a decent interest rate. Unfortunately, these bonds are not always exempt from state and federal income taxation.
You can buy municipal bonds that serve underserved people. These people do not have access to affordable housing, reputable or safe educational facilities, medical care, or may have bad roads in their neighborhoods.
When you invest in the municipal bond, you support the construction of highways, schools, bridges, and more.
Generally, there are two types of municipal bonds. They are divided based on the amount of interest paid, and the debt returned.
- General Obligation BondA government entity issues this bond. Some general obligation bonds are paid with dedicated property taxes, while others with general funds.
- Revenue BondA revenue bond is another municipal bond type, backed by revenue generated by a specific project, such as an expressway, or local stadium. The issuer guarantees the lending amount and interest payments for the revenue bond.
By investing in municipal bonds, you can fund your local government for public works. They can use your funds for making parks, bridges, roads, and libraries. You get the investment amount plus interests on municipal bonds when they complete the maturity date.
The good thing about municipal bonds is that they are income-tax-free. Also, they are more secure than stocks.
Apart from municipality bonds, you can buy stocks of public traded companies. These firms invest in underserved communities. This method is not a direct community investment. Nevertheless, it provides investors with options to look for higher-return stocks.
See Related: How to Buy Green Bonds (Step-by-Step Guide)
8. Affordable Housing and Real Estate
Real estate investment is the best option if you want to earn passive income indefinitely. It has the potential for long-term passive income. At the same time, you can provide affordable housing to the needy in your area.
Investing in real estate helps you improve the neighborhood and the lives of people living in it. However, real estate community investment will be ethical only when the rent is fair – consider the ongoing housing crisis in the U.S.
See Related: How to Become an Impact Investor
P2P or peer-to-peer lending is an unconventional way to invest in the community. If you do not want to lend to the government or invest in public bonds, you can consider P2P lending.
Peer-to-peer lending gives you better returns than bonds. However, for this, you must have enough money.
Peer-to-peer lending enables you to provide loans to needy individuals in your community. These are the people who are unable to get loans from traditional institutes.
The interest rate you earn from peer-to-peer lending is higher than several low-risk investments. Besides this, you get an option to invest in small enterprises and businesses of your choice.
See Related: Best Ways to Invest in Affordable Housing
Mainvest is an ideal platform that lets you invest in a wide range of community investment programs. This crowdfunding program has been designed to support local businesses.
Mainvest connects local small businesses and investors. It lets you invest in promising local businesses in your community.
The platform supports real estate ventures, restaurants, bakeries, breweries, and tons of other businesses. Note that Mainvest focuses on local brick-and-mortar companies only.
Mainvest offers over 300 investment opportunities. Over 90% of Mainvest’s companies are in good standing. You can make diversified portfolios by investing in different brick-and-mortar businesses.
The best part about this platform is that it is open to non-accredited investors.
For those who do not know, accredited investors are those who earned $200,000 in the last two years and are expecting to make a similar amount this year.
Furthermore, their net worth must be at least $1 million, excluding the primary residence cost. Besides this, the SEC rule requires them to be recognized as an “Accredited Investor.”
The platform makes money by charging a one-time fee when a business completes a raise. The best part is that the investor does not need to pay charges.
So these are some of the ways you can invest in the community. Let us take a look at some community investment strategies.
Community Investment Strategy
Undoubtedly, community investing is socially responsible investing. Nevertheless, everyone looks for a decent profit out of their investments. As a result, work on some community investment strategies.
1. Set a Budget
First of all, budget for your community investment in the similar way you would for any other business expense. You cannot invest beyond your budget. Analyze what amount you can afford to invest in the community.
Apart from this, consider the percentage of profit you are looking to earn. Several community investment options are available in the market. Balance risk and returns depending on your affordability.
2. Set Aside Some Fund
A lot of new investors make this mistake. They do not set aside some funds for unforeseen emergencies. If you want to help your community wholeheartedly, have an emergency fund. It will help you contribute reactively to your community even if you meet an unexpected crisis.
See Related: Reasons to Start Social Impact Investing
3. Invest in Communities Relevant to Your Business
When investing in the community, you must make an impact investment that improves the community relevant to your business.
The community must matter to your customers or employees – ideally, both. This focus will help you communicate your impact easily.
Community investing is very rewarding. If everything goes as per the plan, you will support economic development in your community while making huge returns.
4. Screening of Investment Program
You must screen your financial resources provided for community investment. Make sure borrowers are not using your investment to produce unethical services or products. Your investment must not diminish the health of your community.
For example, do not invest in projects like coal production or tobacco companies. These projects could be harmful to the environment of your locality.
Try to invest in clean energy projects that positively impact climate change. In short, your investment must be in line with your moral beliefs and values.
5. Leverage Shareholder Advocacy
This community investment strategy lets you make more impact on the community. You can use the power of your stock ownership to promote social and environmental changes within the community.
For instance, you can engage with local restaurants and encourage them to remove unhealthy food from kids’ menus.
In the same way, if your community investment program invests in a local pharmaceutical firm, you can push them to increase access to cheaper medication or medical equipment in low-income communities.
6. Keep Track of Your Investment
You must keep an eye on the investment program you join. Make sure they are not doing anything unethical. At the same time, the program should do well so that you can earn decent returns.
See Related: What are Social Returns on Investment?
Pros and Cons of Community Investments
Community investment has a lot of benefits for community building as well as investors. If everything goes as planned, community investment could be very beneficial.
If you lose money, you may be able to gain some relief by deducting your losses on your tax return.
Another advantage of community investing is that you improve the lives of so many people within your community. If you have invested in an area close to your home, you can even enhance your own living experience.
Some notable benefits of community investment are as per below.
- You Feel Good about your Investment. One of the primary advantages of community investment is that you can invest in a project that aligns with your values. Since your investment improves the lives of underserved communities, you should feel happy.
- Bring Positive Change to Society. Community investment promotes businesses engaged in jobs that do better for the community and society.
- You Get Good Returns. Community investment lets you make the investment that benefits the entire community. Still, you make a profit.
Along with profits, community investing has some limitations too. It can be risky as you invest in people and businesses that traditional banks and lenders consider risky to lend to.
Sometimes, your increased risk does not compensate for the good returns. And the returns you get may not be as large or as rapid as less ethical, more traditional investments.
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Community Investment: FAQs
1. Is my money safe with community investment?
Community investment is comparatively a new concept. Therefore, some investors are concerned about the safety of their money.
You can make your Community investment as safe as traditional bank investments. However, for that, you will have to invest through community development banks or credit unions. After all, credit unions and community development banks are federally insured.
There are many community investment options that are not insured. For example, Venture capital funds, community development loan funds, and microenterprise funds.
Community mutual funds also fall in the same category. These are high-risk and high-reward community investing options.
It is advisable that you get adequate knowledge of community investing before investing.
2. How much return can I expect from community investing?
The returns from community investing vary depending on the project you choose. If you open an account at community development banks, you will get interest rates comparable to traditional banks. On the other hand, the interest rate of capital funds differs from fund to fund.
3. Do I need a huge sum of money for community investment?
No, you don’t need to invest huge sums of money. There are several community investment options that let you start investing at a low price. You can check out Mainvest.
Community investing provides you with an opportunity for meaningful and measurable investment. If you are looking to build your investment portfolio, it is a good idea to start with community investing. You will deliver social benefits to your community.
At the same time, social investing will offer you respectable financial returns. However, we advise you to do your research before investing. Happy investing!