The Benefits of Adding Private Real Estate to Your Investment Portfolio

Most Americans own stock, also known as equities, in publicly traded companies. More precisely, says Gallup, 62% of Americans own stocks directly, through mutual funds, and in their retirement accounts. Bonds, which are debt securities issued by government entities and corporations, are the other large asset class. Cash is widely held, too, according to Investopedia.

It makes sense for Americans to invest in equities, because the stock market is highly liquid — you can buy or sell shares virtually anytime. Plus, the stock market’s track record is pretty good. Since the late 1920s, the compound annual growth rate of the S&P 500 is about 10%, says Investopedia, assuming dividends were reinvested.

Other types of investments — often known as “alternative investments” — are held by fewer people. Generally, this is because alternative investments are less liquid (thus more difficult to trade), and because they are less easily compared to other investments on an apples-to-apples basis. Think selling a second home versus selling a painting that has “appreciated” in value.

In some ways, investment real estate is the least alternative of alternative investments because investment properties can generate income like stocks can pay dividends, and because real estate can appreciate over time like stock prices can rise. (By the way, income-producing investment properties are all around us: Warehouses, apartment buildings, shopping centers, office buildings, and all sorts of other special-use facilities that Americans frequent every day.)

Private Real Estate is Different From Stocks

At the same time, private real estate is different from stocks in a couple of notable ways. For one thing, the value of private real estate assets doesn’t typically rise and fall in tandem with the stock market. In other words, their performance is not correlated. In this way, real estate represents diversification from stocks and presents the opportunity to do well when the stock market is flat or even down.

Real estate’s performance is a function of many factors, including supply and demand, location, demographics, macro and microeconomic growth, the quality of the investment and asset management teams, and the business plan for the asset or portfolio.

Private real estate has become increasingly appealing to high-net-worth investors, family offices, and RIAs (registered investment advisors), especially to those investors with patient capital who recognize that real estate is a long-lived asset class. Patient capital allows for an income property’s business plan to be implemented and realized in order to maximize the investment opportunity for income and appreciation over time. In other words, patient capital isn’t necessarily looking to get in and out of investments quickly. Or, in the case of the stock market, panic sell when stocks go down.

It’s easier than ever to access investment properties and enjoy the potential benefits of private real estate investing, which can include:

●        Income from the cash flow of investment properties.

●        Appreciation from the gain on sale of investment properties.

●        Tax benefits including depreciation and passive losses.

●        Diversification relative to stock and bonds, as well as real estate diversification by property type and geography.

●        A hedge against inflation, particularly for property types like multifamily that can increase net operating income through more frequent rent increases as leases roll over. (Inflation also tends to increase the cost of capital, which makes new construction of additional supply less attractive.)

Many financial planners recommend including alternative investments in your portfolio. There’s no consensus on the right allocation; it comes down to what’s right for you personally. Delta Wealth Advisors, as one example, recommends that between 25 and 40 percent of an investor’s net worth including their home be in real estate. Carefully consider your real estate allocation in consultation with your financial and tax advisors.

Private Real Estate Has the Potential to Outperform Other Investment Classes

At Midloch, we target annual returns in the range of 13 to 17 percent, net of fees, for our investment funds. Since inception, we’ve actually surpassed our target, doubling investor money on fully cycled (exited) investments, as of the first-half of 2024. (Of course past performance is no guarantee of future results, and there is risk of loss of invested principal.)

Midloch succeeds by leaning into an investing philosophy that leads us to identify at least two or three ways to make money with every investment before we make an acquisition. You can read more about our approach here.