Most experts agree that diversification is a key component to managing overall portfolio risk and volatility. But, while it’s common to diversify portfolios among stocks and bonds, your possibilities don’t end there. Alternative asset classes, such as private real estate (PRE), can inversely correlate to a negative downturn in traditional equity and fixed-income investments, providing additional diversification and potentially improving your risk-adjusted returns.
Diversification by Property Type
Investing in various types of real estate properties can help protect you from cyclical economic shifts. For example, multifamily rental properties and self-storage units tend to perform well during times of economic uncertainty and inflation, while some commercial properties may perform better during periods of economic growth.
At the same time, investing in commercial properties like a retail center or office building can provide exposure to a completely different sector of renters and may offer additional benefits such as longer-term leases with credit-worthy tenants.
Investing in properties located in different parts of the country can also allow you to reduce concentration risk within your portfolio. For example, owning apartment properties in Nevada, Texas, and Florida can help manage your overall portfolio risk compared to owning three single-family rental homes in the same town.
Diversifying with DSTs
While diversifying your real estate portfolio can be advantageous, for many investors, the cash required for a direct real estate investment limits the opportunity to purchase multiple property types in various locations. This is particularly true for those who plan to allocate only a small portion of their total portfolio to real estate investments.
In this case, a Delaware Statutory Trust (DST) may be a viable solution. A DST is a legal entity that holds one or more income-producing commercial properties. Rather than directly investing in a property, A DST enables you to purchase a fractional interest of the property that’s inside the trust.
DSTs can provide exposure to multiple property types and locations with a much smaller investment. For example, you may be able to diversify your portfolio by purchasing a DST that owns self-storage units in the Midwest and apartment complexes in the sunbelt states.
Qualified Opportunity Funds
Qualified Opportunity Funds (QOF) also offer you the potential to own institutional-quality real estate. These funds invest in one or more economically distressed and underserved communities that have been designated as Qualified Opportunity Zones (QOZ) by the U.S. Treasury and IRS.
Since there are QOZs located in all 50 states, Washington D.C., and U.S. territories, investors can use QOFs to spread their risk. For example, you may purchase a QOF that is building ground-up retail in Virginia and one that is developing multifamily housing in Utah.
Additional Benefits of Private Real Estate
Not only can Private Real Estate investments provide portfolio diversification, but they also offer other benefits, such as the potential for tax-efficient income and growth and unique estate planning opportunities. To learn more about some of the potential advantages of investing in PRE, download our free e-book, “Tax-Advantaged Investing: The Power of Private Real Estate.”
Once you’ve reviewed the information, you may find that you’re interested in exploring your options in greater detail. The professionals at Fortitude Investment Group are here to help.
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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient, and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
Certain QOZ areas may not be able to appreciate as predictably as more established areas. Some neighborhoods may be more accommodating to development than others, impacting the success of the investment. Development and redevelopment of real estate traditionally have more risk than other types of real estate strategies. The availability and cost of construction and development financing is uncertain and represents a risk inherent in the execution of a QOF strategy. The rules and regulations of the QOZ Program are complex, compliance with the QOZ Program comes with significant challenges. QOFs tend to be illiquid investments for ten or more years.
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