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.
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.
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.
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.