Real Estate: Portfolio Considerations

"I like the idea of real estate, but...how does it actually fit in my portfolio?"

It's one of the most important questions an investor can ask.

On one hand, real estate is tangible. It throws off income. It’s built into the portfolios of pension funds, family offices, and endowments. But for the individual investor, especially in the private markets, it can feel ambiguous. Is it a growth asset? An income play? A hedge? A tax shelter?

At Contour Allocations, we approach that question through a simple framework:

Every investment should serve a strategic purpose and be executed with tactical intent.

We like to think about the strategic purpose as the why. Income, capital growth, diversification, or long-term wealth preservation. Often, it’s a mix. The tactical intent is the how. Without clarity on the strategy, the tactics can drift. Without tactical intent, the strategy can fall short.

Let's explore some of the most common strategic purposes for why real estate would be included into the portfolio. Note, we'll save a deeper dive into each of these for another time.

1. Income Generation

Private real estate can generate meaningful, consistent, income. In many deals, investors receive quarterly or monthly distributions, depending on how the asset performs.

Real estate income is backed by tenants, leases, and operations. And while not all properties are income-focused, you can often select strategies that match your personal income goals.

Think of it like a menu. Depending on your income goals, you can align your tactical positioning with the appropriate real estate investment. Some of the things you'd consider are what types of real estate (multifamily property vs office property for example), what part of the capital stack (common equity, preferred equity, debt, etc.), and what type of return profile (core, core +, value-add, and opportunistic are the traditional "buckets"). Note, with each bucket, position in the capital stack, or return profile, there are many more considerations to think through to properly align your tactical position to your strategic purpose.

2. Capital Appreciation

Over time, real estate values can increase. Generally speaking, the simplest way to think about investment real estate appreciation is through the following:

Value = NOI / Cap Rate

If the NOI (net operating income at the property) increases, all else equal, the value will increase. If the Cap Rate (inverse of a "multiple" like the P/E in stocks) comes down, all else equal, the value goes up.

Real estate assets can provide meaningful opportunity to create value for investors. Just remember, appreciation is not guaranteed. And generally speaking, the more focused an investment is on appreciation, the more risk there may be.

3. Diversification

Private real estate tends to behave differently than stocks or bonds. It’s less correlated to public markets and more tied to local economic factors, tenant health, and asset-specific performance. From a traditional asset allocation perspective, private real estate falls between fixed income (bonds) and equities (stocks) in the risk-return spectrum. Clearly, that's a generalized statement and comes with many nuances.

It's helpful to think of the diversification logic through the underlying variables or key drivers of the returns, and how those variables can be less correlated to the variables that drive the returns of bonds or stocks.

Worth mentioning is that traditional finance measures will typically conclude that adding real estate to a portfolio can reduce overall volatility and improve the risk-adjusted return of the portfolio. We'll save a larger conversation about why "volatility" is not the best measure of risk or diversification for another time, but there is no question private real estate can provide material diversification to an investor's portfolio.

4. Inflation Protection

Real estate has historically been one of the better inflation hedges available to investors. Why?

• It’s a hard asset that tends to rise in value with replacement costs.

• Leases often include escalation clauses or reset to market rates.

• Fixed-rate debt means you’re repaying in “cheaper” dollars over time.

While it’s not a perfect inflation shield, it has a long track record of preserving purchasing power for investors, over time. That does not mean asset values always go up with inflation, especially in the short-term.

5. Tax Benefits

Private real estate comes with real tax advantages such as depreciation, pass-through losses, or potential 1031 exchanges. This can make the after-tax return more attractive than what’s on the headline.

Of course, always consult a tax pro. But the tax efficiency of real estate is a big part of its value proposition, especially for high-income or high-net-worth investors.

6. Capital Preservation

Lastly, real estate is often used as a long-term store of wealth. It doesn’t mean risk-free but well-chosen assets with strong sponsors and business plans can provide protection of principal over time, especially when combined with amortizing debt.

In a world of uncertainty, real estate can be an “anchor” allocation for many portfolios and has been used as a store of value asset for a very long time.

Final Thoughts: Know What It’s For

Before evaluating a specific deal, ask yourself what you are looking for real estate to provide. When you know what you’re solving for, everything else (structure, returns, risk) comes into sharper focus.