THE ADVANTAGES OF PRIVATE REAL ESTATE

Pri­vate real estate has his­tor­i­cal­ly deliv­ered attrac­tive risk-adjust­ed returns.  Many times, out­per­form­ing pub­lic equi­ties and bonds over long time hori­zons. Investors may won­der why and how to get into pri­vate real estate.  

April 24, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ist & DST Advisor/Specialist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Inte­grat­ing pri­vate real estate into an invest­ment port­fo­lio can enhance returns, reduce risk and volatil­i­ty, and pro­vide dis­tinc­tive diver­si­fi­ca­tion ben­e­fits.

There may be enhanced or high­er returns

Strate­gi­cal­ly adding pri­vate real estate to an investor’s port­fo­lio can increase long-term returns. There are many com­par­isons uti­liz­ing real estate and most select a peri­od of time for the com­par­i­son. By allo­cat­ing 10% or 15% of pri­vate real estate to a stan­dard 60/40 allo­ca­tion to stocks and bonds over a 10-year peri­od, an investor’s port­fo­lio would have gen­er­at­ed high­er total returns. The hypo­thet­i­cal aver­age over 10 years would be about 7% with 60/40 port­fo­lio and 7.8%-8.2% with a 60/25/15 port­fo­lio.  This is based on his­tor­i­cal sim­u­la­tions.

Diver­si­fi­ca­tion-Low cor­re­la­tion with tra­di­tion­al assets (stocks and bonds) helps reduce port­fo­lio volatil­i­ty and smooth out returns dur­ing mar­ket down­turns.

LOWER VOLATILITY POTENTIAL

By fac­tor­ing pri­vate real estate into a stan­dard 60/40 port­fo­lio, an investor would also have expe­ri­enced low­er volatil­i­ty over the last 10 years, lead­ing to a cor­re­spond­ing increase in their risk-adjust­ed returns as mea­sured by the Sharpe ratio.

Giv­en the effects of com­pound­ing over time, min­i­miz­ing volatil­i­ty in an invest­ment port­fo­lio is impor­tant for long-term cap­i­tal preser­va­tion and future income growth.

• Income is fre­quent­ly a sig­nif­i­cant com­po­nent of the total return deliv­ered by pri­vate real estate invest­ments. Cur­rent income pro­vides more sta­bil­i­ty than growth because it is less depen­dent on unknown and uncon­trol­lable mar­ket fac­tors to gen­er­ate its return.
• Over the last 20 years, the pri­vate real estate index only lost val­ue dur­ing the Great Reces­sion, dur­ing which time it dropped sig­nif­i­cant­ly less than the S&P 500. The S&P lost 37% of its val­ue in its max­i­mum one-year draw­down dur­ing that peri­od, while the pri­vate real estate index declined only 17% in its worst year. The cur­rent inter­est rate spike requires investors to under­stand the mar­ket. Many areas of the coun­try have entered a real estate slow­down.  This may affect oth­er alter­na­tive invest­ments until investors can sell cur­rent real estate.

Sta­ble Income

• Most pri­vate real estate invest­ments pro­vide con­sis­tent cash flow through rental income, mak­ing them appeal­ing for income-focused investors.

Infla­tion Hedge

• Rents and prop­er­ty val­ues tend to rise with infla­tion, pro­vid­ing a nat­ur­al hedge in infla­tion­ary envi­ron­ments. There is always cau­tion in times where rents are flat and prop­er­ty val­ues are not ris­ing or even stag­nant.

Cap­i­tal Appre­ci­a­tion

• Well-man­aged prop­er­ties can increase in val­ue over time due to mar­ket dynam­ics, improve­ments, and devel­op­ment oppor­tu­ni­ties.

Tax Effi­cien­cy

• Investors may ben­e­fit from depre­ci­a­tion deduc­tions, §1031 exchanges, and oth­er tax advan­tages that can enhance after-tax returns.

Delaware Statu­to­ry Trust (DSTs)

• Cash investors as well as 1031 exchange investors have the abil­i­ty to invest in insti­tu­tion­al grade real estate with a frac­tion­al own­er­ship inter­est.  With min­i­mum ini­tial invest­ments poten­tial­ly as low as $50,000 ($100,000 for 1031 exchanges) small­er accred­it­ed investors may have access to insti­tu­tion­al real estate.

Illiq­uid­i­ty Pre­mi­um

• Because pri­vate real estate is not eas­i­ly trad­ed, investors are often reward­ed with a pre­mi­um for lock­ing in cap­i­tal longer-term. DST also have illiq­uid­i­ty and the pas­sive nature of the invest­ment as well as qual­i­fy­ing for 1031 exchanges make DSTs attrac­tive to some investors.

BALANCING A PORTFOLIO’S RISK AND RETURN.

To pro­tect investor cap­i­tal and income over the long-term, an invest­ment should bal­ance max­i­miz­ing returns and min­i­miz­ing volatil­i­ty. Com­par­ing invest­ments that make a con­cen­trat­ed allo­ca­tion in pri­vate real estate with those focused on oth­er major asset class­es illus­trates how the addi­tion of pri­vate real estate can help to strike this bal­ance.

Next, we will dive into the Cost of Diver­si­fi­ca­tion.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your §1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC §1031 Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.