Real Estate Investing Basics

3 Investments To Insulate Your Real Estate Portfolio From a Market Downturn

9 Articles Written

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Diversification can be defined as investors putting their money in multiple companies across multiple industries to maintain a certain level of return. But diversification is equally as important—albeit somewhat different—when it comes to real estate investing.

For example, investing in an S&P 500 Index fund is one of achieving stock diversity since it invests in the 500 stocks that comprise the S&P 500 Index, which includes a cross-section of companies across 11 segments. A diversified fund like an S&P 500 Index fund allows retail investors to achieve returns that track the S&P 500 without having to buy shares of all 500 companies themselves.

An S&P 500 Index fund perfectly illustrates how stock diversification works. By spreading risk across multiple companies and industries, expected losses from some stocks can be offset with gains from others. It’s a balancing act that allows investors to maintain a certain level of return.

However, a diversified fund, like an S&P 500 Index fund, also reveals the flaw with stock diversification. What if the whole market sinks? Diversification won’t spare you from a 50.9% drop in the Dow like in 2008.

Related: The Irrefutable Advantage Real Estate Investors Have Over Stock Investors

Why a Diversified Real Estate Portfolio Is Better Than a Diversified Stock Portfolio

The role of diversification in passive commercial real estate (CRE) investments is different than the role it plays with stocks because the end-game is different. The objective of investing in passive CRE investments is to compound wealth—not to merely maintain a certain level of return.

Think of passive CRE investments as part of a wealth-building machine that feeds off the cash flow from a portfolio of investments. As you feed the machine with cash, it compounds that cash through appreciation and reinvestment.

Unlike with stocks where diversification won’t save you from a crash, diversification in the passive CRE asset class has proven to insulate investors from downturns, protecting their wealth-building machine. Because investors can diversify CRE assets across geographic markets, asset classes, property types, and investment strategies, the right mix of properties will ensure uninterrupted cash flow.

With the right assets in the right markets, income may dip with some assets but won’t come to a screeching halt. This is because people don’t stop needing housing and businesses (e.g., offices, warehouses, etc.) overnight. And because CRE assets are illiquid, owners don’t unload them in a crisis like with stocks, driving down their values.

The financial crisis of 2008 and the latest pandemic-induced crisis have taught us that not all markets or assets are equally affected by downturns. Some are more resilient than others. The key is to not have all your eggs in one basket.

Diversification Options: Public vs. Private

Passive CRE investments are available in both the public and private markets. But how do they stack up against each other in terms of diversification and the ability to withstand market downturns? In the public markets, REITs (real estate investment trusts) are the principal investment option. In the private markets, real estate syndications and private equity are two alternatives.


Pros: Because REITs are publicly traded, investors can buy as little as one share of individual REIT stocks. Theoretically, investors could buy multiple REITs without huge capital outlays to diversify their portfolios.

Cons: On the flip side of the coin, being traded publicly can cause volatility by correlating to the entire market. In a crash, REITs will not be insulated. Moreover, in a downturn, management always gets paid first.

Related: 28 Smart Questions to Ask a Broker When Investigating Out-of-State Markets


Pros: Real estate syndications are ubiquitous. Investments are available across every state (and even offshore) and across all asset classes and property types. The opportunity for investors to diversify through syndications is readily accessible. Additionally, because of waterfall compensation structures common in real estate syndications, investors come first. In a downturn, even if profits are squeezed, investors will typically be the first ones to receive distributions.

Cons: In the hands of the wrong management, syndications can be risky.

Private Equity

Pros: Real estate private equity firms invest in other private companies that invest in real estate—not in properties. The benefit of investing in the right PE firm with a diversified portfolio of private companies in multiple markets and asset classes is that this reduces the need for investors to invest in multiple companies themselves to diversify.

Cons: Cost of entry into PE firms is typically higher than with syndications, sometimes starting at $250,000 or more.

Getting Started

Investors tend to stick to what they know. That means investing in one asset class in their backyard. This deprives them of opportunities to expand and diversify their income stream across multiple asset classes and geographic markets.

How do you get started? If your goal is to diversify your passive CRE investments across multiple markets, asset classes, and property types, be proactive. Seek out those private opportunities through syndications and PE firms to help you achieve this goal.

Make connections with brokers and agents who are connected to new markets you may be interested in. Leverage social media (LinkedIn, Facebook, BiggerPockets, etc.) to make these connections. Chances are these brokers and agents are familiar with the active syndications and PE firms in their markets. Besides, with relaxed advertising rules applicable to certain private exempt offerings, passive CRE investment opportunities can now be found through a web search.

To achieve true diversification—diversification that will preserve income and insulate against downturns and volatility—look beyond your local market and core competency. Seek out seasoned syndicators and managers who have been around the block and know how to navigate their way around a crisis. Screening and selecting competent management will be key to achieving your diversification goals.

What are your strategies for diversifying your real estate investments?

Share with a comment below!

Logan Freeman is the founder and managing member of Live Free Investments and co-founder of FTW Investments. Logan oversees the company's acquisitions and investment strategies. He also personally selects all key investment markets and asset classes to meet the goals of investors. Logan brings over six years of real estate investing experience. Logan has helped out-of-state investors actively purchase over $70M worth of real estate and himself has over $50M of assets under management, including close to 1000 multifamily doors, two hotels, NNN shopping centers, self-storage, and office buildings.
    Christopher Smith Investor from brentwood, california
    Replied 2 months ago
    Diversification is insurance against ignorance, the better you genuinely understand your investments the less you will want to "diversify". As we all possess some level of ignorance (even the very best investors) some level of diversification may be in order, but the lesser the better to achieve truly long term superior results.
    Tim Parker Investor from Bremerton, Washington
    Replied 2 months ago
    Logan, buying an S&P index fund is NOT diversified. Very bad oversimplification. Having all your investment is RE is not diversification either. You need investments in completely unrelated classes.
    Josh Gold
    Replied 2 months ago
    Isn't a diversified portolio in commercial real estate getting crushed right now in most US markets? Time will tell if this is a buying opportunity or a long term trend.
    Dan Peterson
    Replied 2 months ago
    Diversification in the market doesn't protect you against a downturn? Yes it does. Investing into the S&P doesn't allow you to take advantage of compounding returns? Yes it does. Lol you don't need to erroneously bash the stock market in order to make your product appear superior. They are both good things...
    Aaron Clough Real Estate Agent from DFW Metroplex
    Replied 2 months ago
    Thanks for sharing Logan. From what I’ve seen, syndications have been gaining a lot of traction (or at least more social media hype) as a way for retail investors hedge against market conditions that may negatively impact a traditional stocks/bonds portfolio. Up to this point, most multifamily operators and GP’s I’ve spoken with, say that returns have been relatively strong and a ton of deals are still getting done. All the above mentioned are equity investments but what do you think 2021 holds for those using debt as an asset, with rates being historically low? Would love the insight and thanks for the article.