Javier Benson: Creating A Diversified Investment Portfolio

At RealtyShares, we believe in the deals that we put on our platform. In order to create a robust marketplace for individual and institutional investors, we apply our experience to attracting and vetting high-quality middle-market sponsors, who can present us with high-quality deals, which we underwrite and bring to the platform. We have purposefully built a marketplace with a variety of investments possessing different risk/return profiles, spanning across senior debt, mezzanine debt, preferred equity and JV equity, as well as residential and commercial, for the purpose of allowing investors to build a truly diversified portfolio in one place.  

For our equity deals, RealtyShares focuses on transparency: gathering the information needed for investors to identify which investments could potentially yield what are considered good “risk-adjusted” returns. This is a very important concept for building a diversified portfolio. All other things being equal (purchase price, asset location, etc.), a lower return objective typically signals lower risk and a higher return objective typically signals higher risk.

For example, the same operating assumptions with more leverage will yield a potentially higher return objective than the same operating assumptions with lower leverage. Increased leverage translates to a potential increased risk of default, so investors should really make sure that they are balancing risk by exploring lower leverage opportunities. Similarly, higher-quality assets typically have lower return objectives than lower-quality assets; the same exists with geographic areas, etc. We believe that a well-diversified portfolio takes into account all parts of the risk spectrum with different weightings based on investor preferences and suitability.

Risk vs. Reward

Potential for high return objectives or cash yield objectives should not be your only consideration when investing. For example, an office building in New York, NY may have a lower risk profile than an identical office building in Knoxville, TN (my hometown). As a result, the JV equity return objectives for the New York deal may be lower than the return objectives for Knoxville — investors may desire a +4 percent cash yield objective and a total return objective of around +8–10 percent on an asset in New York, whereas in Knoxville, they might target an annual cash yield objective of +8 percent and a total return objective of +16 percent.

It might be tempting to stack a portfolio with the more enticing, albeit riskier, investment options, but from our perspective, the relationship between risk and return is very important for investors to understand, so they can size up portfolios and make sure they have some typically safer assets represented by high-quality offices, industrial and apartments assets in some normally less risky areas, as with New York in the aforementioned example.

That is why we provide data and information (and eventually analytical tools) that give customers a representation of risk. For example, If there is a deal listed at an 11 percent return objective versus one at 16 percent, there is a reason for that return objective difference: internally, thanks to our professional underwriting teams, RealtyShares has determined the 16 percent return objective to be riskier than the 11 percent return objective. Similarly, a 12 percent return objective debt investment priced equivalently to a 12 percent equity investment has been determined to be identical in risk, and those factors are regularly outlined in the deal pages themselves.

The goal is to make it easy for investors to understand their portfolio compositions through transparency and make investing effortless. To achieve this ease of use, it is also necessary to  read the details of a deal very carefully before investing.

Diversification in real estate and beyond

Generally speaking, real estate is a practical addition to some investment portfolios, as it is not directly correlated with the S&P 500 (at least in the short-term). The uncorrelated nature of real estate to the public markets, short-term, can be very powerful for portfolios, because there is no daily repricing based on market fluctuations. Of course, this makes real estate a relatively illiquid option, so it is best to plan where investment money goes accordingly.

Furthermore, within real estate itself, investors should also keep a diverse set of properties in their investment portfolio, because not all expected returns will end up being achieved by all investments. RealtyShares is one of the few and largest platforms available that let users build a diversified portfolio between debt and equity, commercial and residential, and low- and high-risk options, all across different time horizons. This is just one of many attributes that makes RealtyShares a one-stop shop for investors and sponsors alike.

Javier Benson
Head of Capital Markets
Javier has deep experience in real estate, finance, strategy and technology. Javier worked in management consulting at Accenture and DiamondCluster before working in investment banking at Barclays and as a VP of acquisitions at 643 Capital, an SF real estate PE firm. He holds a BSE and MBA from the University of Pennsylvania.