Articles
February 20, 2024
Investment Insights
Many investors are attracted to real estate investing for the passive income it can provide during retirement years. That prompts a common question: Can you actually invest in real estate using funds in your retirement accounts?
The short answer is yes, you absolutely can in most cases. This post will explain why that can be a smart decision and how you can make it happen with DLP Capital.
Passive real estate investments are usually considered “alternative investments.” Typical retirement investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs), whereas the alternative category might include assets such as real estate, private debt/equity, hedge funds, venture capital, and commodities. As the size of a retirement portfolio increases, the likelihood of investments in alternative investments increases. Ernst & Young estimates that nearly half of high-net worth investors will be using alternative investments by 2024. More than 80% of ultra-high-net-worth investors—those with assets of $5+ million—are estimated to use alternative investments.1
Surprisingly, only a fraction of retirement plans offer alternative investments among their options and allocations for investments within a plan. As an alternative asset class, real estate offers numerous advantages that can round out the typical retirement portfolio. Read on to learn more about three reasons to consider adding real estate to your retirement portfolio mix.
Allocations to private real estate investments in an investment portfolio can offer resiliency to erratic market conditions in the short-term. Private real estate investments are generally not as volatile as other investments in public markets. What does that mean? When public market prices react to interest rates, volatility tends to have less impact on real estate investments compared to the broader public markets. An interesting in-depth regression analysis by Norges Bank Investment Management shows that private real estate has quite a low correlation to public equity sectors, whether financials, industrials, telecom, etc., over the course of one to two years. Private unlisted real estate investments, in particular, absorb transitionary market shocks, such as inflation and interest rates, better than listed real estate stocks2.
Norges Bank Investment Management
It can be reassuring, therefore, to know that an off-year in the public markets will not necessarily have a severe impact on a non-correlated asset class such as private real estate investments. Longer term (2+ years) the correlations between equities and real estate converge more, which makes sense; if there’s a systemic market catalyst, every investment will tend to feel the effects. But even then, real estate will generally have less direct correlation to an erratic stock market. So as a private real estate investor, you might be able to sit back and let your investments do the work for you, worrying about such investments less on a short-term basis than investments in the broader public markets.
A traditional 60/40 allocation to equities and bonds is no longer the gold standard for a portfolio mix and, in fact, that ratio may not help meet long-term investment goals for retirement. That 60/40 may be a starting point, but in saving for retirement—years in the distance—some may argue to be more aggressive with diversification. Benjamin Graham, the Columbia University finance professor who long ago taught Warren Buffett about value investing, settled on a 50/50 split as a starting point, with rebalancing over time depending on market conditions. Increasingly, alternative investments are part of achieving that “balance,” broadening the diversification of a portfolio.
When looking at alternative investments, consider the example set by the nation’s biggest and perhaps savviest investors—institutional investors, including pension funds managing retirement funds into the trillions. U.S. institutional investors have loaded up on private assets, increasing their allocations to alternative investments steadily from 2001-2022.3 The primary reasons noted for allocating to alternative investments in these types of portfolios are:
How do passive real estate assets stack up? Real estate assets can add diversification to a portfolio. Check. They can provide steady cash flow via rental income. Check. Real estate assets tend to absorb transitionary shocks, such as from inflation, better than some other investments. Check.
Now let's consider returns. Portfolios designed to provide the highest return at the lowest volatility (risk) fall along the efficient frontier curve and are considered 'optimal.' What exactly is an “efficient frontier”? An efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk, i.e. the lowest risk for a targeted return. As evidenced from returns data 2007-2023, the most efficient, optimal portfolios included not only traditional equity and fixed-income investments but also private investments into real assets.5
In short, while retirees are often attracted to real estate for passive income, there’s the potential to optimize a portfolio for enhanced returns that allow retirement funds to continually grow.
And if you’re investing in real estate with retirement funds, that growth comes tax-free until you retire and start withdrawing the funds. (Tax rules differ, of course, for withdrawals from different retirement account types – which gets complex enough that we won’t attempt to cover everything in this short post.)
The first step is determining what type of retirement account you’ll be using to invest. If you have Individual Retirement Accounts (IRAs) or 401(k)s at a major brokerage firm like Fidelity or Schwab, you simply need to open a brokerage account and move the real estate investments into that account. (That said, please note that additional terms may apply.) DLP Capital’s Funds are all available for investment in such accounts. Our Investor Success Team can help guide you through that process.
If you’re still contributing actively to an employer 401(k), you’ll want to contact your 401(k) provider to see if they offer the option to move funds to a brokerage account, which would allow for private investments like real estate.
For those still actively saving towards retirement, you’ll want to consider ways to automate your savings into DLP Capital’s Funds. DLP Capital offers the Auto-ACH Program, an automated savings program that increases your investment by a minimum of $10,000 every quarter. (You can customize for the exact amount.) You can also opt to take distributions either quarterly or monthly (depending on the fund), or choose to let those distributions compound and grow over time. It’s smart – and it couldn’t be more convenient. Contact the Investor Success team to learn more and enroll.
INVESTORS ARE RESPONSIBLE FOR CONSULTING THEIR OWN TAX ADVISOR AS TO THE TAX CONSEQUENCES ASSOCIATED WITH YOUR INVESTMENT. THE TAX RULES ARE COMPLEX, CHANGE FREQUENTLY, AND DEPEND ON THE INDIVIDUAL TAXPAYER’S SITUATION. NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IS MADE BY DLP CAPITAL.
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