Building a Real Estate Investment Portfolio

For four decades, the 60/40 portfolio served as the default allocation for moderate-risk investors. Sixty percent equities supplied growth, forty percent bonds supplied ballast, and the low correlation between the two delivered respectable risk-adjusted returns. That arrangement rested on a single assumption: that when stocks fell, bonds would hold. In 2022, that assumption broke.

The traditional balanced portfolio declined roughly 17.5 percent in 2022*,⥏ its worst calendar year since 1937 and the fourth worst in the last 200 years, as equities and high-quality bonds sold off together and their correlation turned positive for the first time in a generation. Returns have since recovered: the same portfolio gained 17.2 percent in 2023, and the Morningstar Moderate Target Risk Index, a globally diversified 60/40 benchmark, returned 15.95 percent in 2025*.⥏ But the correlation has not recovered with them. At the end of 2021, the three-year correlation between US stocks and long-duration Treasuries was negative 0.35; at the end of 2025 it stood at 0.65*.⥏ While the single-year readings have improved, dipping slightly below zero in 2025, the three-year relationship has not reset. 2022 made a structural point that advisors have not forgotten: in an inflationary regime, bonds are not a reliable diversifier, and a portfolio built on two correlated public asset classes carries more concentrated risk than its split suggests.

That realization has pushed a growing number of institutions from a two-asset model to a three-sleeve one. Goldman Sachs, analyzing thousands of professionally managed portfolios through its GS PRISM framework, found that equities accounted for roughly 80 percent of the risk in moderate-risk portfolios, far more than their nominal weight implied. KKR and UBS have each proposed versions of a 40/30/30 framework: 40 percent equities, 30 percent bonds, and 30 percent alternatives, with private real estate as an explicit allocation. The argument isn't that the 60/40 is dead. It needs a third sleeve, and private real estate is one of the most established candidates to fill it.

For investors and advisors building that sleeve, three characteristics make private real estate a valuable component of a real estate investment portfolio: income, diversification, and tax efficiency. The sections below examine each, with the data that supports them.

Pillar One: Durable, Income-Led Returns

Within real estate, strategy is the lever that balances income against growth. Four risk profiles span that spectrum, from income-anchored core to appreciation-driven opportunistic, with each mapping to a different point on the income-versus-growth tradeoff.

*Realized median net IRRs per Preqin data as analyzed by CAIS Group*⥏, across mature private real estate funds (2001-2017). Core and Core-Plus are reported as a combined category. Realized returns reflect the gap between underwriting targets and actual outcomes: Opportunistic funds, despite the highest target IRRs, delivered lower realized returns than Value-Add.

Core and core-plus strategies anchor the income end of this spectrum, and that is where private real estate's distinctive return profile is most pronounced. Private real estate's return is driven more by income than by price movements, which is the feature that sets it apart from public market allocations. The NCREIF Property Index (NPI), the primary institutional benchmark for private commercial real estate, has carried its recent returns almost entirely on income. Trailing-year NPI income yields held near 4.8 percent*⥏ for a fifth consecutive quarter through Q4 2025, while full-year appreciation totaled just 0.2 percent. At the property level, the NPI returned 1.22 percent in Q3 2025, of which 1.16 percent was income*⥏, and only 0.06 percent was appreciation, with a trailing four-quarter total return of 4.72 percent.

For an investor who needs the portfolio to produce, that distinction is the point. Income aims to be contractual and recurring, while appreciation is generally cyclical and uncertain. An asset class whose return is income-led behaves differently from equities, where total return depends heavily on multiple expansion, and from bonds, whose income is fixed and erodes in real terms during inflation.

Multifamily sits at the center of this case. Apartments account for roughly 29 percent of the NPI by value*⥏, the largest single share among property types, and they benefit from continuous lease turnover, allowing rents to reset with the market. This dynamic is particularly meaningful in supply-constrained Mid-Atlantic and Southeast markets, where continued population migration and housing shortages have helped support occupancy and rental demand above national averages. Current pricing reflects steady institutional demand: CBRE's Q4 2025 underwriting survey put the average going-in cap rate for core multifamily at 4.75 percent, with an exit cap rate of 4.95 percent*⥏, both little changed quarter over quarter, signaling stable rather than distressed valuations.

Pillar Two: Genuine Diversification

The reason private real estate earns a place beside stocks and bonds is correlation. Over long horizons, private real estate has shown a low and relatively stable correlation with both equities and bonds. Invesco*, calculating correlations from 1996 through 2025*⥏, notes that private real estate's volatility has tracked more closely with bonds than with stocks, producing attractive risk-adjusted performance. American Realty Advisors*⥏ and TIAA make the same structural observation: publicly traded REITs correlate more closely with the S&P 500, and that correlation rises in down markets, while private real estate does not move in lockstep with public equities.

But there's a caveat. Because the NPI is built on appraised values rather than daily trades, it understates true volatility and correlation due to appraisal smoothing. The diversification benefit is real and well documented, but it is somewhat less dramatic than headline correlation figures suggest. Presenting it that way is what separates credible analysis from a sales chart.

Diversification also operates inside the real estate allocation itself, and this is where portfolio construction diverges sharply from single-asset ownership. A single building concentrates risk in one market, one tenant base, and one set of local conditions. Research using NCREIF data*⥏ has long found that diversifying across property sectors reduces risk more effectively than spreading across geographies alone. A pooled, multi-property vehicle delivers exposure across markets and sub-types in a single position, something an investor holding one or two buildings directly cannot replicate. For most clients, fund-level or co-investment access is the only practical way to achieve real diversification within the sleeve.

Diversification across property types is the clearest illustration. The major commercial sectors enter 2026 in very different positions, and multifamily has the lowest vacancy among them, which is part of why it serves as a core income holding rather than a tactical bet.

Source 1*⥏ | Source 2*⥏ | Source 3*⥏ | Source 4*⥏

*Multifamily, office, and industrial figures are vacancy rates; retail is shown on an availability basis, which CBRE reports in place of a directly comparable retail vacancy rate and which typically runs modestly higher than physical vacancy. All figures: CBRE Research, Q1 2026.

The same dispersion runs across markets. National averages conceal wide local variation: in early 2026, apartment vacancy in oversupplied Sun Belt metros such as Austin ran materially above the national average, while gateway markets like New York remained significantly tighter. A single-asset, single-market position carries that variation as concentrated risk. A diversified fund or co-investment platform spreads it across markets, which is the structural advantage that fund-level access holds over direct ownership of one or two buildings.

Pillar Three: Tax Efficiency and Ownership Structure

The third pillar is where private real estate offers something neither stocks nor bonds can: the ability to hold an income-producing asset in a structure that defers or shelters tax. How the asset is held determines liquidity, control, and tax treatment, and the same property can be owned in several ways.

Three mechanics drive the tax case:

Depreciation. Direct ownership, syndications, and DSTs pass depreciation deductions through to the investor, which can shelter a portion of the income each property produces. REITs handle it differently. Shareholders do not claim depreciation on their own returns, but depreciation taken at the REIT level reduces the REIT's taxable earnings, which often causes part of each distribution to be characterized as return of capital. Under current law, return of capital is generally not taxed in the year received; it reduces the investor's cost basis and may defer the tax until the shares are sold. The remainder of distributions is characterized as ordinary dividends or capital gain distributions based on the character of the REIT's underlying income.

The 1031 exchange. Under Section 1031 of the Internal Revenue Code*,⥏ an investor can defer capital gains tax by exchanging real property for like-kind replacement property. Direct ownership qualifies, and so does a Delaware Statutory Trust: IRS Revenue Ruling 2004-86*⥏ established that a DST beneficial interest is treated as direct ownership of real estate for this purpose. A syndication interest does not qualify because it is an interest in a partnership rather than in the property itself, and partnership interests are excluded from 1031 treatment.⥏

The 721 UPREIT. Section 721 allows an investor to contribute qualifying real estate to a REIT's operating partnership in exchange for operating partnership units, without triggering tax at the time of contribution. It is a separate transaction that may become available to a DST investor at a later point, at the operating partnership's discretion, rather than a predetermined sequence. Once an investor holds operating partnership units, the tax-deferred route back into direct real estate is closed. Used deliberately, it allows an investor to move from active ownership to a diversified, passive position while deferring the gain. Bonaventure's multifamily income trust (BMIT®) is the non-traded, perpetual-NAV REIT that can receive such 721 UPREIT contributions, giving investors who pursue this option a diversified, professionally managed multifamily position rather than a single building.

These structures allow an advisor to match the holding to the client's situation: a 1031 into a DST for the owner deferring gain and stepping out of management, or a 721 UPREIT exit for the owner ready to transition into a diversified portfolio for the long term.

From Single Assets to Portfolio Construction

A well-structured real estate investment portfolio balances income, diversification, and tax efficiency to support long-term performance. A single building delivers income but concentrates risk and offers no diversification within the sleeve. A diversified, professionally managed allocation delivers income, spreads the risk across markets and property types, and can be held in structures that defer tax on entry and exit.

Bonaventure offers the full range of these structures, from Multifamily Co-Investments to Tax Equity Solutions, including DST replacement property for a 1031 exchange, 721 UPREIT exit options, and custom solutions for large and complex transactions. With more than $600 million of sponsor capital co-invested alongside clients, Bonaventure provides investors and advisors with a single institutional partner for building a diversified multifamily allocation.

To discuss how diversified multifamily fits a portfolio, investors and advisors can schedule a consultation with Bonaventure.

Speak With the Bonaventure Team to Start Building Your Portfolio

This article is for educational and informational purposes only and is not intended to be all-inclusive and may be changed at any time without notice or obligation to update. This article does not constitute tax, legal, or financial advice. Bonaventure does not provide tax, legal, or accounting services. Tax laws and regulations are subject to change, and individual circumstances vary. Investors should consult their own tax advisor, attorney, or qualified intermediary regarding their specific situation before pursuing any of the strategies discussed.

*These articles were produced by an independent third party. These articles should not be considered a solicitation or recommendation. Any such recommendation or solicitation would be made under separate cover. We do not endorse or accept responsibility for the content of any third-party website.

This material is not an offer to sell or a solicitation of an offer to buy any interest in the Bonaventure Multifamily Income Trust or any fund sponsored by Bonaventure or its affiliates. Any offering is made only pursuant to a confidential private placement memorandum (PPM) and related offering documents, which should be reviewed in full and which control in the event of any inconsistency with this material. Certain statements are forward-looking and subject to risks and uncertainties. BMIT interests are not registered under the Securities Act of 1933 or any state securities laws, and BMIT is not registered under the Investment Company Act of 1940. Securities offered through Preferred Capital Securities, member FINRA/SIPC.

THE RISKS ASSOCIATED WITH INVESTING IN A REAL ESTATE PRIVATE EQUITY FUND GENERALLY INCLUDE:

Limited Regulatory Oversight - Since private equity funds are typically private investments, they do not face the same oversight and scrutiny from financial regulatory entities such as the Securities and Exchange Commission ("SEC") and are not subject to the same regulatory requirements as regulated investment companies, including requirements for such entities to provide certain periodic pricing and valuation information to investors. Private equity offering documents are not reviewed or approved by the SEC or any US state securities administrator or any other regulatory body. Also, managers may not be required by law or regulation to supply investors with their portfolio holdings, pricing, or valuation information.

Strategy Risk - Many private equity funds employ a single investment strategy. Thus, a private equity fund may be subject to strategy risk, associated with the failure or deterioration of an entire strategy.

Use of Leverage and Other Speculative Investment Practices - Since many private equity fund managers use leverage and speculative investment strategies such as options, investors should be aware of the potential risks. When used prudently and for the purpose of risk reduction, these instruments can add value to a portfolio. However, when leverage is used excessively and the market goes down, a portfolio can suffer tremendously. When options are used to speculate (i.e., buy calls, short puts), a portfolio's returns can suffer and the risk of the portfolio can increase.

Past Performance - Past performance is not necessarily indicative and is not a guarantee of a private equity fund's future results or performance. Some private equity funds may have little or no operating history or performance and may use hypothetical or pro forma performance that may not reflect actual trading done by the manager or advisor and should be reviewed carefully. Investors should not place undue reliance on hypothetical or pro forma performance.

Limited Liquidity - Investors in private equity funds have limited rights to transfer their investments. In addition, since private equity funds are not listed on any exchange, it is not expected that there will be a secondary market for them. A private equity fund's manager may deny a request to transfer if it determines that the transfer may result in adverse legal or tax consequences for the offering.

Tax Risks - Investors in certain jurisdictions and in private equity funds generally may be subject to pass -through tax treatment on their investment. This may result in an investor incurring tax liabilities during a year in which the investor does not receive a distribution of any cash from the Fund. In addition, an investor may not receive any or only limited tax information from private equity funds may not receive tax information from underlying investments in a sufficiently timely manner to enable an investor to file its return without requesting an extension of time to file.

Reliance on Fund Manager; Lack of Transparency - A private equity offering's manager or general partner has total investment authority over the private fund. There is often a lack of transparency as to a private equity offering's underlying investment. Because of this lack of transparency, an investor may be unable to monitor the specific investments made by the offering or to know whether the investments are consistent with the sponsor's historic investment philosophy or risk levels.

Due to the risks mentioned above, it is important to perform proper due diligence in evaluating and choosing private equity managers to place your money with. There have been occasions when private equity fund managers took on too much risk in their portfolio and lost a substantial amount of their investors' money.