Edward Fernandez founded 1031 Crowdfunding in 2014 and has more than 20 years of experience in sales, real estate and investments.
As market dynamics evolve, I see investors seeking strategies to align portfolios with their individual needs and objectives. While the real estate sector has experienced volatility over the past few years, I find that there are still many opportunities to diversify investments from the standard equities and bond mix.
But to do so, it’s important to understand your end goals as well as the different types of investments or vehicles that can optimize your assets. Beyond traditional methods, here are three creative strategies to fortify and expand your portfolios and accumulate wealth.
1. 1031 Exchanges
As someone who leads a real estate investment platform for various alternative investment vehicles, I’ve seen how leveraging Delaware Statutory Trusts (DSTs) for 1031 exchanges has transformed real estate investments by allowing investors to defer capital gains taxes. DSTs offer fractional ownership in high-quality real estate through a trust, providing access to diversified portfolios without the complexities of property management.
Typically held for five to seven years, DST investments can offer monthly cash flow distributions and a share of sales proceeds, including potential gains from appreciation. Notably, DSTs can serve as replacement properties in 1031 exchanges, enabling tax deferral while offering passive ownership, diversification and professional management.
It’s important to note, though, that while DSTs offer compelling advantages, they are generally illiquid and restricted to accredited investors. Risks include sponsor creditworthiness and operator competency. As a DST beneficiary, the investor has no decision-making power in the asset. Therefore, performing your due diligence on the sponsor and operator, interest rate, liquidity risks and management fees is crucial before making any financial decisions.
2. REITs
A lot of investors tend to think that purchasing stock is easier than outright investing in real estate. But luckily, there are investment vehicles today that make it easier to invest in real estate without the burden of property management. When it comes to hedging against the volatility of the stock market, real estate investment trusts (REITs) can be a powerful addition to your portfolio.
If you are worried about the market’s unpredictability, REITs can offer diversification and passive income opportunities. Specifically, non-traded or private REITs are not correlated with equity market fluctuations, which can provide an investment more rooted in real estate value. This is not to be confused with publicly traded REITs, which can be viewed more like equities since their share price can fluctuate with market movements.
A REIT is a company that operates, owns, and finances income-producing real estate. Investors pool funds to purchase assets held in a portfolio and own shares in the REIT, not the properties. The REIT manages the properties, collects rent, and distributes income dividends to shareholders, providing access to institutional quality real estate without direct ownership or management responsibilities.
There are many types of REITs available including retail, residential, office and even healthcare REITs. Senior housing can be an attractive sector within healthcare for investors because of the increasing demand for such facilities. As one of the largest sectors in healthcare, senior housing has become a thriving sector with many investment opportunities. We have all heard the numbers: starting in 2025, 10,000 people per day will turn 80. As the nation’s senior population grows, so does the demand for housing and services that are able to accommodate their evolving needs.
Evaluating a non-traded REIT investment requires careful consideration of its risks and benefits. Consider the dividend profile as well as metrics such as PE ratio, earnings per share, external growth prospects, and maintaining occupancy rates, to name a few. Private-placement REITs are typically available only to accredited investors and are not highly liquid.
Non-traded REITs often start as blind pools, lacking transparency about specific properties, which can pose risks. However, advisors can adjust the portfolio by adding or removing properties to maximize value. I find that REITs can offer a balance between active and passive income, enhancing portfolio stability and long-term growth.
3. 721 Exchanges
One of the biggest mistakes I see investors make is poor estate planning. You might think that the best thing to do before you die is to put your child’s name on the title of the deed to your home. This can have huge tax consequences for your heirs. Transferring property to your child may subject your heirs to capital gains tax upon its eventual sale.
Utilizing tax-advantaged investment vehicles can elevate your real estate portfolio in the present while keeping estate planning in mind for the future. For example, a 721 exchange allows you to contribute property to an umbrella partnership real estate investment trust (UPREIT) in exchange for equity units, deferring capital gains taxes and receiving dividends.
Upon the investor’s death, units can be converted to REIT shares and divided among heirs. These shares are typically easier to liquidate than physical properties. Heirs receive a step-up in basis, meaning taxes are based on the market value at the date of death. Depending on redemption policies, heirs can hold the shares for dividends or liquidate them for cash.
While 721 exchanges offer benefits, they are not suitable for everyone. These are passive investments, so investors have no decision-making power or direct involvement in property management. Investors also can’t control when the REIT sells the property, which could trigger unexpected taxes. Consulting with a tax professional or advisor is essential to determine if this strategy fits your financial situation.
Adapting portfolio strategies to market changes is crucial for real estate success. As a part of this, innovative approaches can unlock new wealth opportunities, each offering unique benefits for specific financial goals. Consider your objectives and risk tolerance before starting a new strategy. Ultimately, I am a firm believer that diversifying your portfolio, especially with real estate, can help achieve long-term investment goals.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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