Real Estate as an Asset Class - Insights from the Realized Team

Posted Feb 23, 2022


Realized was recently featured on the Retirement Repair Shop podcast with Mary Beth Franklin. During the episode, we shared our insights on using real estate as an asset class while planning for retirement. Many retirees don’t consider real estate when planning for the future, but it can be a way to diversify your portfolio.

What Are the Advantages of Real Estate Investments for Retirees?

One of the biggest challenges for retirees is finding investments that can replace the income from a previous job. Realized focuses on direct private commercial real estate investments, which are stabilized properties that seek to provide recurring cash flows and strong returns due to a potential capital appreciation.

By investing in professionally managed commercial real estate, investors are able to seek a steady income stream without the hassles associated with direct property ownership. Investors are not burdened by the trash, tenants, and toilets associated with owning an investment property. In addition, real estate is not directly correlated with traditional asset classes like stocks and bonds, so it can provide a hedge against inflation.

Finally, investing in commercial real estate can provide several types of diversification for investors. Investors are able to diversify their investments according to geography, property type, and holding period, which can help manage overall portfolio risk.

How can Retirees Access These Investments?

Most investors only have exposure to commercial real estate via Real Estate Investment Trusts (REITs), if they have any at all. Most REITs are traded like stocks, so you may not get the same benefits that you would get with large-scale commercial assets.

Large-scale commercial assets track the NCREIF index, but this isn’t accessible to the average investor. These assets typically require a huge amount of capital to invest in, and there isn’t a publicly traded index on the market for them either.

It’s also common for accredited investors to have rental properties in their investment portfolio. They often sell these properties when they reach retirement age, as property management can be time-consuming.

Realized strives to provide a way to address these challenges. This is done mostly through a Delaware Statutory Trust (DST), which gives investors ownership interest in one or more properties. These investments start at approximately $25,000, which is much less than investing in a large-scale commercial property directly.

Transferring assets from a traditional rental property into a DST allows investors to keep their money in the real estate market. DSTs can give investors an option to diversify to a portfolio that strives to improve returns while eliminating property management challenges. DSTs seek to generate monthly income for the investor and also come with a variety of tax benefits.

To determine if real estate is a suitable investment for a client, Realized assesses their current financial situation as well as their investment goals. This includes questions about current assets, their risk tolerance, and their investment needs.

What should investors know about DSTs?

DSTs are available to accredited investors only. Accredited investors must meet certain net worth or income requirements. They must typically meet a threshold of $1 million in total assets in a wide variety of classes. Many retirees meet the threshold to become an accredited investor but don’t realize it.

It’s also important to note that DSTs are 1031 exchange eligible. This means that investors can sell an existing real estate investment and put those returns directly into a DST without having to pay capital gains taxes. For example, if you had a rental property you wanted to sell, you could essentially swap it out for a DST.

DSTs allow you to diversify your portfolio and can provide stakes in multiple properties. Different types of properties run on different economic cycles, which is why we think it’s so important to have diversification within a real estate portfolio. The properties in your DST are chosen with your risk tolerance in mind. For example, a commercial rental property backed by investment-grade credit might be appropriate for a conservative investor, while a multifamily residential property in a growth market might be suitable for someone with a higher income.

Another benefit of DSTs is that they are professionally managed. Investors don’t have to worry about the day-to-day operations of the trust the way they would with a traditional property. This is an advantage for retirees who are looking for hands-off investments that still have the potential to generate current income.

The average holding period for a Delaware Statutory Trust is 5 to 7 years. Realized also offers investments designed to last for over 10 years, as well as investments with holding times as short as 3 years.

It’s important to consult with a financial professional to determine whether real estate may be the right investment for you. Depending on your income goals, risk tolerance, and current portfolio diversification, DSTs and real estate may be an investment to consider.

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. 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.
The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time. 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. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. Risk tolerance is an investor’s general ability to withstand risk inherent in investing. There is no guarantee a recommended portfolio will accurately reflect your tolerance to risk. 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.

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