Looking for a Free Lunch? Try Diversification.

A quote by Nobel Prize laureate Harry Markowitz saying Diversification is the only free lunch

Looking for a Free Lunch? Try Diversification.

A quote by Nobel Prize laureate Harry Markowitz saying Diversification is the only free lunch

Diversification is the only free lunch.

Nobel Prize laureate Harry Markowitz

Are you truly diversified with a few index funds or market tracking ETFs? Is the Classic 60/40 portfolio composed of 60% stocks and 40% bonds going to protect your wealth? Are you standing still or losing money with bond yields? Did your portfolio plummet in March 2020? Maybe it is time to take some volatility off the table and invest in something stable.

One look at the chart below and you can see how you might just be missing the world’s biggest asset class in your portfolio. Real estate is arguably the best asset class for income generation, appreciation, inflation protection, tax benefits and wealth generation. Real estate is and has been the “World’s Most Proven Asset Class” for thousands of years; maybe it is time you take a look at it.   

A pie chart showing Global Asset Class sizes and market shares showing real estate as the largest asset class along with US Equities, Fixed Income, Oil & Gas, Crypto, Commodities and asset backed securities.

*Source: Zheleva & Associates Research 

Although none of us enjoy paying taxes, it’s fair to say that the tax code in the U.S. is very friendly to property owners. Here’s a closer look at some of the many tax benefits commercial real estate investors enjoy.

Real Estate Is The World’s Biggest Asset Class

Any well-constructed portfolio should include exposure to real estate. While your house may count as some of that exposure, it is better to diversify into cash flowing commercial real estate. 

Most High Net Worth investors, Family Offices and Institutional investors, such as insurance companies and pension funds, have higher exposure to real estate investments. What do they know that the average investor might not know? 

Wisely chosen commercial real estate investments not only provide regular income (higher than bond yields in most cases) but are also tax advantaged in that the government provides tax incentives for investing in real estate to promote development. 

Real Estate Has Many Asset Classes

Real estate does not get the media attention and spotlight like Wall Street, so it can be confusing to people not familiar with the real estate investment industry.

The major asset classes within commercial real estate are: Office; Retail (shopping centers, malls and free-standing stores); Industrial (manufacturing, warehouses, logistic centers, cold storage, etc.); Multifamily (apartments); and Hospitality (hotels, motels and resorts).

Other significant asset classes are: Net Lease (Net lease or triple net properties can also be considered one of the major asset classes which will be explained later); Mobile Home Parks; Single Family Home Rentals; Self-Storage; Medical; Data Centers; and Cell Towers.

Net Lease Properties Are Bonds Wrapped In Real Estate

With Single-Tenant Net-Lease properties you not only get the benefits of typical real estate investments, you also get a long-term lease with a brand name corporation that guarantees payment of the lease. Real estate lease payments are one of the highest-priority obligations a corporation has as an expense. Even in the event of an unlikely bankruptcy, the courts by law have to prioritize the tenant paying rent above bond interest or any return of capital to stockholders.

Related Link: Net Lease Properties Versus Muni Bonds  

Additionally, during the COVID-19 pandemic of 2020, many local governments, states and even CRCs declared eviction moratoriums and rent holidays for apartment renters.  Commercial tenants were obligated to pay rent per the terms of their leases and the majority of single-tenant net-lease service and necessity business operators never missed a rent payment.

These tenants are well capitalized to weather a storm and many continue expanding during both up and downturns.

Modern Portfolio Theory is a finance concept that seeks to allocate risk and preserve portfolio returns by distributing capital across multiple assets classes, including Stocks, Bonds and “Alternative Assets” like real estate and venture capital.  We would add that you should consider an allocation to gold, Bitcoin and other carefully considered cryptocurrencies. 

This allocation process is dominated by Wall Street and ends up putting your capital at risk to the whims of Presidential Tweets and market-manipulating games played by well-connected hedge funds and the Wall Street Bets crowd. 

Many High Net Worth investors have found greater success and financial freedom with an investment portfolio more heavily weighted towards real estate. 

Related Link: Why are Net Lease Properties Popular with High Net Worth Investors and Family Office Investors?

Even with a heavy real estate strategy, you should avoid “Putting All Your Eggs In One Basket.”

Being diversified in real estate should also entail different real estate asset classes: Net Lease, Self-Storage, Apartments, Industrial, Mobile Homes, Farm Land, etc. 

You should also be in different markets and have the rents paid from different types of tenants and industries.

What Diversification Is Not …

Even if you have allocated a portion of your investments into real estate, you may not be sufficiently diversified.  Investing in one or two Single Family Rentals or even a few multifamily syndications might still concentrate your capital into one asset or one geographic region. 

What happens if the state or local government declares an eviction moratorium or rent control on your apartment building?

Is that self-storage property in a hurricane zone or that mobile home park in tornado alley?

What if that last mile distribution facility tenant goes bankrupt?  Is Amazon too big to fail?  Only thirty-five years ago, Sears was the “World’s Largest Store” and also  owned insurance companies, real estate brokerages, television & radio stations, malls and even the world’s tallest building. Now Sears as a tenant is distressed real estate.

All reasons to have more diversification and income protection for your passive income.

The Stable and Tradable Private Real Estate Concept

The idea for Liberty Real Estate Fund was conceived in 2017 because of two converging forces:

  1. Retail Real Estate, like malls and shopping centers, were being impacted by online sales.
  2. Bitcoin and cryptocurrency trading was spiking with no apparent value backing the coins.

Out of these two trends, the Liberty Real Estate Fund I portfolio was developed. As retail real estate operators in business since 1990, we were a part of the trends pushing for Demalling*.  We saw a trend toward freestanding, highly visible buildings on main streets that, in many cases, needed to add drive-thru facilities.

As real estate investors, we asked cryptocurrency experts, “Why not tie these digital ‘Coins’ to tangible and scarce real estate?” This idea, as it turns out, is not necessarily new. In 1729, Ben Franklin wrote that money could be backed and secured by land, in his words “coined land”.

Related Link: How Blockchain Will Revolutionize the Future of Commercial Real Estate  

Liberty Real Estate Fund Diversification

We took both of these influences and combined them together to create Liberty Real Estate Fund I achieving Stable and Tradable Private Real Estate. We will go into more detail on the tradable aspects in a later article.

Related Link: About Liberty Real Estate Fund

Liberty Real Estate Fund acquires Single-Tenant Net-Leased (NNN) real estate assets that include auto service, convenience stores, financial services, mobile phone providers, medical & veterinary services, pharmacies, supermarkets, and necessity business properties operating in high growth markets throughout the United States.

The Liberty portfolio is designed for investors to achieve:

  • Geographic Diversification
  • Industry Diversification
  • Tenant Credit Security

High Growth Markets Throughout The United States

A map of the United States showing high growth markets that are ideal for real estate investing.

Industry and Tenant Credit Diversification

A graphic showing the Industry Diversification Of Liberty Real Estate Fund Portfolio with pictures of Family Dollar, Drug Stores, Auto Services, Gas Stations like 7 Eleven.

These Net Lease properties have long-term contractual rents backed by some of the world’s largest and best brand name, exceptionally well-capitalized companies.  The well-located real estate consists of hard assets that have intrinsic value.

The assets can be described as “Corporate bonds wrapped in real estate”.  

Would you like to start investing in single tenant net-lease properties but aren’t sure where or how to get started? Take a look at the stable, monthly cash flow that a diversified portfolio offered by Liberty Real Estate Fund can do for you or contact us today to learn more HERE.

*Demalling is the repurposing of unsuccessful malls to higher and better uses, such as freestanding retail stores, medical facilities.

Note: Liberty Real Estate Fund I LP and Liberty Equity Management LLC (collectively LibertyFund.io) have made every attempt to ensure the accuracy and reliability of the information provided. Liberty cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.

About the author

Picture of Michael Flight, CEO of Liberty Real Estate.

Michael Flight is a founding principal of Concordia Realty Corporation, Concordia Equity Partners LLC and more recently CEO of LibertyFund.io, a net leased property fund curated to create a conservative, safe haven portfolio of long term, Single-Tenant Net-Leased properties designed for geographic diversification, tenant credit diversification and industry diversification.

Michael is a real estate entrepreneur who is an expert in Retail Real Estate (Shopping Centers and Single-Tenant Net-Leased investment, leasing, operations, and redevelopment. Michael has been active in commercial real estate over the past 35 years and has handled more than $500 million worth of real estate transactions. Michael has extensive experience in development, leasing, sales, property management, and innovative financing techniques.  

Michael has been featured on The Real Estate Guys Radio Show, Cash Flow Connections podcast, and the Cash Flow Ninja podcasts to name a few.  Michael is also a well-known speaker at FreedomFest, Investor Summit, the Intelligent Investors Real Estate Conference, the Multifamily Investor Network Conference, and the Global Family Office Summit in Dubai. He is host of the Nothing But Net – NNN Show a podcast all about Net Lease, Triple Net and NNN investing. Co-host of the Chicago Blockchain Real Estate Collective and co-founder of the Blockchain Real Estate Summit.