How Commercial Real Estate Investing Can Add Balance to Your Portfolio

Posted Apr 26, 2023

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David Wieland, CEO and co-founder of Realized, recently authored an article in Kiplinger examining the benefits of adding real estate investments to your balanced portfolio. Read the recap below and the complete text at Kiplinger.com.

Modern Portfolio Theory (MPT), which advocates for investors to consider some tweaks to the traditional 60/40 mix of stocks and bonds in their investment choices, is an investment strategy that helps investors use diversification to manage their risk while seeking greater overall returns.

While institutional investors like pension funds often have between 30 and 50 percent invested in alternative assets, many individual investors have limited their participation in alternatives to 5 percent. Modern Portfolio Theory recommends that a diversified portfolio include between 10 and 20 percent of other options, including real estate, hedge funds, and private equity.

Direct vs. passive real estate investing

Data from Griffin Capital shows the difference in risk and returns for a 55/35/10 portfolio compared to a traditional 60/40, which doesn't include real estate. According to data from, the average return in a portfolio of 60/40 stocks and bonds is around 6.86%, while a portfolio that has 55/35/10 of stocks/bonds/real estate has slightly higher average returns of 7.06%. While some investors have used direct real estate investments as a diversification tool, they may tire of the management responsibilities of tenants and transition out of real estate.

Investors may want to consider transitioning to passive investment by acquiring REITs (Real Estate Investment Trusts) or DSTs (Delaware Statutory Trusts). Both of these are investments in commercial real estate acquired and managed by professional entities. The trust sponsors pool capital from investors to identify, finance, and manage the selected assets, and the investors share the potential returns.

With either investment destination, the active real estate investor can enter the passive option and exit their active asset ownership using a 1031 exchange. In most cases, publicly traded REITs have lower minimums and higher liquidity, while DSTs are available only for Accredited Investors and are not liquid investment options. Both have risks and advantages; potential participants should consult their financial advisor before deciding.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.

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.

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

There is no guarantee that the investment objectives of any program will be achieved.

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