Creating a diversified real estate portfolio is as much an art as it is a structured approach. Real estate investors often aim to create a diversified collection of properties that can withstand market fluctuations while delivering potentially consistent returns. Crafting a diversified real estate portfolio requires knowledge, strategy, and a keen focus on long-term financial goals.
What Makes a Real Estate Portfolio “Diversified”?
One of the fundamental building blocks in any real estate investment portfolio is the ability to create diversification through a mix of property types, locations, and even tenant mixes.
To help investors understand a possible blueprint for achieving diversification, here are five tips to help construct a diverse real estate investment portfolio that has the potential to generate income and appreciation. However, please remember that at the end of the day, diversification does not guarantee profits or protect against losses, but it can potentially help!
Tip#1: Diversify your investments by property type.
One way to increase diversification is by including multiple asset classes in your investment portfolio. This helps avoid the risk of over-concentration in a single asset group. That means investing in multiple types of income property, from multifamily to industrial to net-leased retail to self-storage to medical office. Think about the age-old expression “don’t put all your eggs in one basket”. This concept of building diversification within a real estate portfolio is similar to the philosophy of not investing in any one stock or single investment.
Tip #2: Diversify your investments by geographic location.
Another strategy for achieving diversification is by acquiring assets across multiple geographic regions. By avoiding over-concentration in a particular local or regional market, investors stand a better chance of protecting themselves from a single geographic event such as a hurricane, earthquake, sweeping rent control measures, or other tenant-friendly laws or regulations that could disrupt investment performance.
Before acquiring properties, defining financial goals is critical. Is the goal to generate passive income, build equity, hedge against inflation, or achieve a combination of these outcomes? Identifying the “why” behind investing will shape every decision, from property type to financing strategies.
Investors seeking long-term growth may focus on high-appreciation markets with robust rental demand. On the other hand, those prioritizing immediate income might lean toward established properties in stable neighborhoods with consistent cash flow.
Tip#3: Avoid higher-risk and volatile property types.
All investment real estate is not created equal. Some asset types have demonstrated they are much higher risk and recession-prone than others. These include hotel and lodging properties, seniors housing in all its forms, and real estate used in the production of oil and gas.
Hospitality, for example, has been hit hard by all three recessions since 2000 and was especially disrupted by the COVID-19 pandemic as travel both for business and pleasure ground to a halt. Senior care is another sore spot.
Real estate assets associated with seniors housing, assisted living, long-term care facilities, and nursing homes are all subject to regulations that increase the risk of operations and ownership, as well as laws that can greatly affect an asset’s performance.
Oil and gas royalties and drilling, likewise, are subject to higher volatility by their very nature. If an oil well doesn’t produce as expected despite due diligence, the underlying asset value can take a serious tumble.
Tip#4: Consider Multiple Sponsor Companies
Another good investment strategy is choosing multiple real estate sponsor firms when considering Delaware Statutory Trust offerings for your 1031 exchange.
This is where Kay Properties can really be of value for potential investors. Each offering presented on the Kay Properties online marketplace is based our our firm’s thorough review of the sponsor’s reputation and track record; however, it is important to know that past performance does not guarantee future results. As a result, investors can select multiple investment offerings from multiple DST and 721 sponsor firms. The Kay Properties sponsor review often includes the following due diligence tasks:
- Background Checks: Conducting comprehensive third-party background checks using industry-leading investigators.
- Track Record Review: Evaluating the sponsor’s history of managing DST and 721 UPREIT investments and assessing their ability to execute business plans effectively. *
- Liquidity Assessment: Analyzing whether the sponsor has been experiencing significant net outflows of capital from their offerings. If so, understanding the reasons behind it and the potential impact on new investors, particularly in 721 UPREIT vehicles.
- Debt Considerations: Reviewing the sponsor’s loan portfolio, including the number of loans maturing in the next 2–5 years and the proportion of variable-rate (adjustable) loans. This is a critical factor when evaluating a 721 UPREIT DST investment.
Tip#5: Consider Multiple Lease Terms and Tenants
One of the practices that Kay Properties encourages investors to consider when investing in a Delaware Statutory Trust is to create a blended portfolio within the tenant and lease types. For example, having assets with long-term net-lease tenants can help provide a steadier potential monthly distribution stream, whereas assets with shorter-term leases provide investors the ability to adjust rents to create the potential for asset appreciation. This strategy is titled the “Anchor and Buoy” to describe these two investment strategies.
With the Anchor and Buoy theory, an “anchor” investment is more fixed, with a lower degree of variability in monthly income potential, like a long-term net leased property with a corporate-backed tenant. These types of anchor DST investments typically perform well during economic slowdowns and other unexpected events.*
On the other hand, a “buoy” investment is one that has the potential for increased appreciation due to shorter-term leases. Buoy DST investments have the potential for increased appreciation due to Net Operating Income growth. However, the monthly income potential may be negatively impacted in events like recessions and other significant events.
Using DSTs When Building Portfolio Diversification
Delaware Statutory Trusts are ideally suited to build portfolio diversification. Say for example, an investor has $1 million to invest in a 1031 Exchange, it can be difficult to find even one property to buy at that price, let alone multiple properties. In comparison, the beneficial ownership structure of DSTs gives investors a variety of choices to diversify that $1 million into multiple investment properties.
If a 1031 exchange investor had $200,000 following the sale of their income property, they could split that investment into four DSTs at $50,000 each. Even for an investor who only wants to invest in NNN properties, he or she can still choose assets with vastly different characteristics. For example, that investor could invest in a Frito Lay distribution center, a FedEx distribution center, a portfolio of Tractor Supply stores or a portfolio of Amazon distribution facilities. The beneficial ownership structure allows the investor to stretch their dollars across multiple assets. In addition, DSTs offer an efficient closing process that makes it easy to execute their 1031 Exchange, even across multiple investments, all within the allowed time period and often much sooner, as DSTs can typically be closed on within 3-5 days.
The majority of individuals who are investing in DSTs are buying multiple DSTs. That being said, everyone is unique in how they choose to diversify investment holdings, and there are many different ways to achieve diversification and a balanced potential income stream. Some examples include:
- Property type: Kay Properties offers investors a variety of property types on the www.kpi1031.com marketplace with options that include apartments, multifamily, industrial, manufactured housing, medical buildings, self-storage, and NNN assets.
- Geographic: DST properties are available across the country in different regions and markets, including primary, secondary, and tertiary cities.
- Resilient or “recession-resistant” types of uses. Think industrial e-commerce distribution facilities or essential dialysis medical treatment centers.
- Single asset versus portfolio deals: Portfolio deals are not necessarily better or worse than a single asset DST, but a portfolio DST does offer an additional layer of diversification.
- Credit quality of the tenant(s), including investment grade and non-rated tenants.
Property Type and Location
Different property types respond in distinct ways to economic fluctuations, making diversification essential for maintaining steady returns. Residential properties, particularly multifamily buildings and rental homes, offer a reliable foundation due to the consistent demand for housing. These assets potentially deliver dependable rental income over time, regardless of broader market conditions.
In contrast, commercial properties such as warehouses, retail spaces, and office buildings often provide higher returns but come with greater exposure to market volatility. Specialty real estate—including assets used for storage, healthcare, or hospitality—presents niche opportunities that can enhance a portfolio with income streams aligned to specific market needs.
“A well-rounded portfolio balances high-risk, high-reward investments with more stable, income-generating properties,” says President of Kay Properties & Investments, Chay Lapin. “Geographic diversity also plays a critical role in mitigating localized risks. Properties in urban centers, suburban communities, and rural regions each offer unique advantages.”
Rapidly growing cities may provide strong appreciation potential, while suburban areas often feature competitive pricing and consistent rental demand. In addition to asset and location diversity, investors should factor in regional economic indicators such as employment growth, population movement, and infrastructure expansion.
Areas experiencing industrial or commercial development are likely to attract new residents, driving up both demand for housing and long-term property values.
Balancing Equity and Debt
For many investors, balancing their use of equity and debt is another crucial piece of the puzzle. Too much debt increases vulnerability during downturns, while insufficient leverage may limit the ability to scale.
Investment structures like REITs or DSTs can potentially help manage debt levels effectively. Delaware Statutory Trusts, in particular, allow investors to buy fractional ownership in large properties without taking on personal debt for the asset.
DSTs may also simplify debt management during 1031 exchanges, offering pre-structured debt options embedded into the investment. Building a portfolio with the right mix of cash-owned properties and leveraged assets provides potential stability while still allowing for growth.
Pay Attention to Market Trends
Real estate markets are constantly shifting, and staying informed is non-negotiable. Real estate investors analyze factors like interest rates, tax laws, and housing inventories to anticipate changes before they occur.
Understanding broader economic indicators is key. Rising interest rates, for example, may reduce buying power, while changes in tax policies can impact the feasibility of certain strategies like 1031 exchanges.
Investors can also look for opportunities in emerging trends, such as growing demand for co-working spaces or shifts in where people choose to live post-pandemic. Staying adaptable helps ensure longevity in an unpredictable market.
The Role of Passive Investments
Not every investor has the time or expertise to manage physical properties. That’s why passive investments like REITs and DSTs have gained popularity.
These options allow investors to participate in large, professionally managed portfolios with minimal hands-on responsibility. REITs offer diversification across multiple properties and markets, while DSTs are structured for tax efficiency, particularly in transactions involving 1031 exchanges.
Integrating passive investments can provide consistent returns while freeing up time to pursue other endeavors.
Regular Portfolio Reviews
Building a balanced portfolio isn’t a one-and-done task. Real estate markets can rise and fall quickly, and properties themselves require ongoing evaluation.
Investors benefit from annual portfolio reviews to assess performance, reallocate assets, and identify underperformers. During these reviews, it’s essential to consider property appreciation, rental income, expenses, and how they align with existing goals.
If certain assets no longer fit the larger strategy, selling and reinvesting proceeds into better opportunities ensures the portfolio remains optimized.
Tax Efficiency: Leveraging 1031 Exchanges and DSTs
Tax planning plays a significant role in maintaining a balanced real estate portfolio. A 1031 exchange is one of the most recognized methods for deferring capital gains taxes when selling real estate. However, meeting the IRS’s requirements can be challenging, particularly when it comes to replacing debt.
Delaware Statutory Trusts simplify this process. A DST comes with prepackaged debt, meaning investors don’t have to secure financing themselves to meet 1031 exchange requirements. This structure ensures debt replacement compliance but also makes the exchange process more efficient.
An investor selling a $2 million property with a $750,000 mortgage can meet the debt replacement requirement by allocating funds into multiple DSTs that offer varying levels of debt. By doing so, they achieve both tax deferral and portfolio diversification.
The future of real estate portfolio management is poised for dynamic transformation as technology, economic forces, and investor preferences evolve. Forward-thinking investors will need to embrace adaptability, leveraging data analytics, AI-driven market forecasting, and automated asset management tools to stay competitive.
The expansion of remote work and shifting demographic trends will continue to reshape where and how people live and work. This opens the door to strategic acquisitions in secondary markets, mixed-use developments, and flexible property types. Meanwhile, regulatory landscapes, including tax policy and interest rates, will remain critical variables that can either hinder or accelerate growth.
Building a balanced real estate portfolio mitigates risk and can potentially position investors for long-term resilience and opportunity. Those who remain agile, well-informed, and intentional about diversification will be best equipped to navigate market cycles and seize emerging trends, ensuring their portfolios thrive in the decades to come.
About Kay Properties and www.kpi1031.com:
Kay Properties helps investors choose 1031 exchange investments that help them focus on what they truly love in life, whether that be their children, grandkids, travel, hobbies, or other endeavors (NO MORE 3 T’s – Tenants, Toilets and Trash!). We have helped 1031 exchange investors for nearly two decades exchange into over 9,100 – 1031 exchange investments. Please visit www.kpi1031.com for access to our team’s experience, educational library, and our full 1031 exchange investment menu.
This material is not tax or legal advice. Please consult your CPA/attorney for guidance. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Potential cash flow, potential returns, and potential appreciation are not guaranteed. There is a risk of loss of the entire investment principal. Please read the Private Placement Memorandum (PPM) for the offerings business plan and risk factors before investing. Securities offered through FNEX Capital LLC member FINRA, SIPC.
