Investing Smartly: Leveraging Commercial Real Estate for Portfolio Equilibrium

David Cohn
Nov 8, 2023
commercial real estate

Navigating today's unpredictable financial environment can be daunting. With a volatile stock market, rising interest rates, persistent inflation, and government debt concerns, the landscape seems uncertain at best.

For those who are looking for a smart way to diversify—especially those who are nearing retirement—incorporating commercial real estate investment into their investments and using the guiding principles of Modern Portfolio Theory (MPT) is a solid strategy.

MPT has long been a guiding principle for savvy investors looking to optimize risk and returns. While the traditional investment portfolio has often relied on a 60/40split between stocks and bonds, MPT suggests going beyond this basic allocation to include alternative assets like commercial real estate.

Why commercial real estate is essential for diversification

Commercial properties can serve as a cornerstone for a well-rounded, risk-mitigated portfolio.

· One of the key benefits of incorporating CRE into an investment portfolio is its general lack of correlation with stocks and bonds. When stock markets are volatile, real estate often remains relatively stable, and sometimes even appreciates.

This non-correlation can serve as a buffer during downturns in traditional markets, potentially protecting your portfolio from severe losses.

· Unlike certain stocks that rely on market appreciation for investor returns, CRE can provide a reliable income stream through rental yields. Businesses need physical locations to operate, and as a landlord, you can collect rent from these enterprises.

The long-term lease agreements commonly associated with commercial properties also provide a more predictable cashflow, offering financial stability to investors.

· Investing in CRE also comes with various tax benefits, such as depreciation allowances and potential tax-deferred growth. These can contribute to the asset's overall profitability and make it an even more attractive option for diversification.

· Finally, CRE can serve as a hedge against inflation. Inflation impacts commercial property investing, increasing the value of tangible assets like property. Furthermore, rent can usually be increased, allowing the income stream to keep pace with inflation.

This is a dual advantage that few other investment classes offer.

Despite these advantages, commercial real estate remains underutilized in the investment portfolios of individual investors, particularly when it comes to retirement planning.

While institutional investors often allocate a significant percentage of their portfolios to alternative assets, including commercial properties, individual investors have been slower to adapt.


The role of real estate in your retirement planning

Balancing a portfolio with real estate has the potential to increase returns while reducing portfolio volatility. CRE can be an effective way to diversify, especially when compared to traditional real estate (which often involves managing tenants and properties directly). 

The benefits of incorporating real estate in retirement planning are magnified when considering the transition from wealth accumulation to wealth distribution. As you approach retirement, you might be looking for investments that not only grow but also provide a reliable income stream.

Commercial real estate offers this dual advantage. These structured investments often provide regular distributions, which can be particularly beneficial for retirees or those nearing retirement who are shifting their focus from capital growth to income generation. 

For those who wish to maintain real estate in their portfolios without the hands-on work, DSTs and REITs (defined below) can be viable solutions.

These vehicles offer the benefits of commercial real estate investment without requiring hands-on management, and they often have lower minimum investment thresholds, making them accessible for individual investors.


Let’s take a closer look at each of them:

Delaware Statutory Trusts (DSTs)

DSTs offer a specialized way to invest in commercial real estate by allowing fractional ownership of properties. This makes it easier for investors to enter the commercial property market without the full financial burden of outright ownership.


· Professional management -

One of the most appealing features of DSTs is that they are managed by sponsors who are experts in the field of real estate. They take on the responsibilities of property acquisition, management, and even the eventual sale of the property.  

This lifts the burden of day-to-day property management from individual investors, freeing them to focus on other aspects of their portfolios.

 · Stability during inflationary periods -

Recent inflationary trends (like those observed in 2022) have put a strain on traditional real estate owners, driving up operating costs and eating into profits.  

The DST structure provides a level of protection against such economic instability. Financial management and risk mitigation are shouldered by the sponsor, creating a buffer that allows investors to potentially enjoy a steadier income stream throughout the investment period.

· Rate flexibility -

Another advantage of investing in DSTs is the inherent flexibility in adjusting rental rates, particularly for certain types of commercial real-estate assets.

For instance, in the case of student housing or apartment complexes, the large number of tenants and the frequency of lease renewals provide ample opportunities to adjust rates in response to market conditions.

 Hotels offer similar advantages, as they can change daily rates based on demand, special events, or seasonal trends. This adaptability can be beneficial for investors looking for investments that can more readily adapt to economic shifts.

 · Investment thresholds and access -

Typically, accredited investors can invest in DSTs with a minimum investment ranging from as low as $100,000. Moreover, these trusts are structured in such a way that the debt associated with the property is held by the trust itself, not by individual investors.

 This means that the risks associated with mortgage loans or other debts are mitigated and managed at the trust level, providing an additional layer of protection for individual investors.


Real Estate Investment Trusts (REITs)


Similar to DSTs, REITs offer a way for investors to passively own real estate properties.  Offering both public and private options, REITs are versatile investment vehicles that come with their own unique benefits and drawbacks.


·       Public REITs are registered with the Securities and Exchange Commission (SEC) and their shares are publicly traded on national stock exchanges.

This feature provides a high level of liquidity, allowing investors to buy and sell shares relatively easily based on market prices. It's a benefit that makes public REITs attractive to many investors, especially those who may need to convert their investments into cash on short notice.

However, this liquidity comes at a cost: susceptibility to market volatility. Because their share prices are determined by the stock market, public REITs can experience price fluctuations influenced by broader economic factors unrelated to the real estate market.  

Additionally, any gains from selling shares in public REITs are taxable events, which could affect your overall investment returns.


·       In contrast, private REITs are not publicly traded and are typically only available to accredited or institutional investors. These REITs offer the allure of potentially higher returns and may be less subject to the short-term volatility seen in public markets.

However, there are downsides to consider. Private REITs are usually less liquid than their public counterparts. The terms for withdrawing your investment can be restrictive, often limited to specific time frames or subject to approval from the fund’s management.

In addition, private REITs generally have higher minimum investment requirements, making them less accessible for the average individual investor.

In deciding between public and private REITs, investors should consider their financial goals, risk tolerance, and liquidity needs. Public REITs may be better suited for those who want more liquidity and the flexibility to easily alter their investment positions.

On the other hand, private REITs could be a good fit for those who are willing to forgo liquidity for the possibility of higher returns and perhaps less exposure to market volatility.

Key takeaway

CRE presents various opportunities for diversification, especially for those looking to stabilize their portfolios as they approach retirement. As always, consulting a financial advisor can provide more personalized guidance tailored to your individual financial goals and risk tolerance.


Explore CRE financing

If you prefer hands-on management of commercial properties over passive investments like REITs and DSTs, having a dependable funding source is crucial.

Capital Investors Direct offers tailored commercial real estate financing options.

Utilizing cutting-edge finance technology, our services include various loan types like CMBS, loans from Life Insurance Groups, and a broad range of Independent Private commercial Lenders to meet your specific needs:

· Hard money - If conventional banks aren't an option, we offer quick and straightforward commercial hard money loans. 

· Bridge and Jumbo Bridge – Do you require interim funding while you lock in long-term finance? Our commercial bridge loans come with fast approval to help you bridge the financial gap.

· Stated income - Our focus is on the value of your asset rather than your credit score, providing loans that demand less paperwork. 

· Permanent loans - Ensure long-term stability with our permanent financing options, which feature the best leverage, long amortization periods, and low-interest rates.

· Cash-out refinance - Want to unlock the value in your existing commercial property? Our cash-out refinance options provide swift access to capital.

Strengthen and grow your portfolio with commercial real estate. Contact Capital Investors Direct for a consultation today, and let us design a financing strategy that matches your personal financial objectives and risk appetite.