Investors seeking portfolio diversification through uncorrelated asset classes may turn their attention to private real estate. These investments are available in various forms, including Delaware Statutory Trusts (DSTs), non-traded Real Estate Investment Trusts (REITs), limited partnerships, and private equity funds, for example.

In many cases, these investments are managed by a professional management team, known as a “sponsor,” that takes investments from multiple investors to purchase and operate investment properties. Often, the sponsor handles all of the day-to-day operations and decisions regarding the acquisition, management, financing, and disposition of the property assets.

The structure and underlying assets associated with private real estate investments create some potential benefits and a few challenges for investors.

Potential Benefits of Owning Private Real Estate

Investors looking for a passive real estate investment and the potential for tax-advantaged income often find private real estate an attractive option. Following are a few additional potential benefits of adding private real estate to your portfolio.

1. Professional Management

Many investors appreciate the potential advantages of owning real estate but don’t want to deal with the hassle of managing the property and handling operational issues like maintenance, rent collection, paying taxes, and property insurance. As a result, most private real estate investments are fully managed by a team of experienced professionals, requiring little to no input from investors.

2. Diversification

Real estate ownership offers diversification beyond a traditional stock and bond portfolio. Some private real estate investments, such as Delaware Statutory Trusts, allow you to own several property types in multiple locations. This can provide additional diversity and help spread out your concentration risk.

3. Potential Improvement of Risk-Adjusted Returns

Historically, private real estate has had a low correlation with stocks and bonds and with REITs and publicly traded real estate funds. Since private real estate generally does not move in the same direction as public markets, it may lower your portfolio volatility and could potentially help improve your portfolio’s overall risk-adjusted returns.¹

Limitations and Risk Considerations

While the benefits may be quite appealing, there are potential limitations and risk considerations investors need to be aware of before adding private real estate to their portfolios, which include but are not limited to the following.

1. Illiquidity

Many private real estate investments are structured to hold properties for an extended period before a liquidation event. While some funds allow for periodic withdrawals, many do not. Since they are generally considered an illiquid investment, it’s critical to ensure sufficient access to other funds in case of a liquidity need before committing to a private real estate.

2. Fees and Expenses

Generally, private real estate investments have more expensive fee structures than publicly traded real estate securities. Investors should ensure a full understanding of the fee structure and weigh the impact of these fees on the investment’s overall performance.

3. Minimum Investment Requirements

Required minimum investments for private real estate often fall in the $25,000 to $250,000+ range. These minimums can put private real estate investments out of reach for many investors, particularly when allocating only a small percentage of your portfolio to real estate investments.

4. Accredited Investor Requirements  

Most private real estate investments are only available to accredited investors. To qualify as an accredited investor, you must either have investable assets of $1 million or more exclusive of your primary residence or have earned at least $200,000 in each of the last two years ($300,000 for married couples) and anticipate earning at least that much in the current year. This requirement may exclude many looking to add private real estate to their portfolios.

Is private real estate investing right for you? To learn more about the potential tax advantages of investing in private real estate, download our free e-book, “Tax-Advantaged Investing: The Power of Private Real Estate.”

¹ Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.

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. 

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.   Any discussion regarding “Qualified Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidance’s, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist, and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any.

A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.  There are risks associated with these types of investments and include but are not limited to the following:  Typically, no secondary market exists for the security listed above.  Potential difficulty discerning between routine interest payments and principal repayment.  Redemption price of a REIT may be worth more or less than the original price paid.  Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.  Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.  This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein.  The offering is made only by the Prospectus.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM, and CIA.