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Public or Private Real Estate? Your Investment Portfolio May Need Both

Many investors who own income-producing investment properties may wonder why their traditional stock and bond portfolios also have an allocation to real estate. It’s not unusual for financial advisors to recommend that clients should own publicly traded real estate securities like REITs or real estate mutual funds and ETFs for added diversification benefits.

When Correlation Collides 

Due to the low correlation between real estate and publicly traded stocks and bonds, we believe there is a compelling case to support the idea there is value in holding both public and private real estate. As a reminder, correlation is a statistic that measures how two securities move in relation to each other. 

For example, stocks and bonds typically have a low correlation which is why advisors construct client portfolios with each. When stocks are underperforming due to economic or market conditions, bonds often provide portfolio balance and help reduce overall volatility. But it doesn’t always work that way. Just consider 2022.

Investors are still stinging from the market losses dished out last year. For one of the rare times in history, stocks and bonds declined at the same time ending the year underwater, with the S&P 500 off 19.4% and bonds, represented by the Bloomberg U.S. Aggregate Bond Index, down more than 12%.1 It’s been estimated retirees lost 23% of their savings in 401(k) retirement accounts in 2022.

Diversification -  Now More Than Ever

Investors won’t readily forget this “no place to hide” anomaly, which is why many investors and their advisors will look to further diversify their portfolios from the potential impact of another severe market drawdown. And real estate is an asset class that will draw increasing attention. 

Public or Private - Or Both

Recognizing that real estate can be an effective addition to an investor’s portfolio, it’s important to look at the differences between public and private real estate options. 

As mentioned, public real estate investments are readily available to investors in the form of REITs and real estate funds. These securities are considered liquid, allowing investors to trade in and out of positions as the market conditions dictate. And public real estate ETFs offer the added advantage of relatively low costs. 

On the other hand, publicly traded real estate securities can be influenced at times by the same broad market conditions as stocks, causing them to perform in a more correlated manner and limiting their ability to help reduce portfolio volatility. 

Private real estate, which can be accessed through direct ownership or a variety of private real estate funds and other structures, is considered an illiquid asset class where investors’ capital can be locked up for extended periods of time. And investment minimums can be higher with private real estate. 

But private real estate isn’t subject to the movements of the publicly-traded markets and subsequently offers an even lower correlation to stocks and bonds than its public counterparts. Also, private investments can be a meaningful alternative source of income and an effective inflation hedge as well.

Risk Considerations

As with any investment, investors should consider the risks associated with public REITs and private real estate investments. Public real estate securities risks include market, interest rate, and concentration risks. Private real estate risks include illiquidity and market, regulatory and credit risks. Carefully assess the risks when considering either of these asset classes.

Let’s Have a Conversation

If you’d like to discuss how your private real estate investments align with the public real estate securities you likely hold in your investment portfolio, schedule an appointment with us here for a no-obligation assessment of these critically important holdings.

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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