Real estate investing plays a critical role in portfolio diversification far beyond simply being a different type of asset. Investors can acquire a real estate company's publicly traded stock or invest in privately held real estate either directly or passively. A private investment in real estate, like multifamily housing, will be largely insulated from the forces that influence public stock markets. As a result, private assets are particularly well suited to reducing investment risk through diversification.
Public Markets Offer Limited Diversification
Buying publicly traded stocks in different types of industries and companies might look like diversification. However, diversity means more than investing in different things within a single market, and the public arena forms only part of the investment universe. For example, the managing director of investment consulting at Ascent Private Capital Management at U.S. Bank called the S&P 500 a single egg basket in a March 2021 interview for Barrons. 
Furthermore, the current state of public securities in the United States has actually become less diverse. The New York Times reported in 2018 that the number of publicly traded companies on U.S. stock exchanges had fallen by 25% since 1976. 
Declining numbers of publicly traded companies mean that the remaining companies have consolidated their influence over markets. Within the S&P 500, the tech giants Alphabet, Amazon, Apple, Facebook, and Microsoft comprise almost 25% of the whole index.  An increasingly consolidated environment promotes asset correlation.
The Threat of Asset Correlation
Asset correlation describes the process of how stocks or assets behave in relation to each other. Assets moving up or down together within a public stock market demonstrate positive correlation. Negative correlation occurs when one asset goes up when another goes down. Asset activities that show no relation to each other are non-correlated. 
According to Modern Portfolio Theory, an approach recognized with the Nobel Prize in Economics in 1990, risk goes down when investments are diversified among non-correlated assets. The absence of correlation among investments can potentially lead to higher returns over the long term. 
Private Real Estate Has Low Correlation With Public Markets
Returns from private real estate investments consistently display little to no correlation with public securities and bonds. For this reason, they have a strong potential to increase risk-adjusted returns for investors previously invested mainly in public stocks and bonds. 
Private Real Estate As an Inflation Hedge
Real estate can demand value increases in relation to inflation. Because rent and property value have a greater ability to rise in relation to inflation compared to other assets, real estate can help a portfolio keep pace with inflation. 
Multifamily properties keep up with inflation as new tenants sign new leases or existing tenants renew leases at elevated rent levels. This gradual process protects investors' revenue over the long term. Additionally, inflation generally adds to the appreciation of an asset should it eventually go on the market at a higher price. 
Institutional Investors Seek Alternative Assets
Passive real estate investing offers individuals a way to replicate the alternative asset diversification strategy leaned on by institutional investors. Investors at that level embrace private assets as a way to limit exposure to public market volatility. According to a 2020 survey of institutional investors by the Natixis Center for Investor Insight, the majority of respondents turned to alternative assets to mitigate public asset fluctuations caused by the pandemic. Additionally, 71% of institutional investors were attracted to the higher returns possible with private assets. 
Passive investment in multifamily real estate connects people with the advantages of private equity while shielding them from the day-to-day work of property development and management. After completing the investment transaction, the investor gains quarterly cash disbursements from rent collection and the eventual sale of the appreciated property.
  https://www.barrons.com/articles/future-returns-investing-beyond-the-s-p-500-01617126920
  https://www.thebalance.com/what-is-asset-correlation-2894312
  https://www.bankofsingapore.com/research/the-role-of-real-estate-in-a-diversified-portfolio.html
Owning real estate, collecting rent, and someday selling property at a profit represent a time-tested process for building wealth. The money does not come without effort though. Multi-family properties require management and maintenance. Market expertise is essential for selecting good apartment building investments to begin with.
People whose careers occupy their precious time can sidestep this workload through passive real estate investing. This route connects passive investors with many benefits. They experience no increased demands on their time, and the profits may often be treated in a tax advantaged way. Additionally, real estate could deliver greater returns than the stock market over the long term.
Work Done by Real Estate Professionals
Passive real estate investing places the wealth-building power of multi-family real estate ownership in investors' hands without burdening them large time commitments. A passive real estate investor partners with an organization run by real estate professionals. The passive investor taps into a team of people who know how to identify and acquire promising properties. Additionally, support systems like property managers and accountants are already in place. Passive investors do not have to spend time building this support network. They simply plug into an existing program focused on multi-family housing investments. 
This arrangement wipes time-consuming tasks off an investor's plate. The experts attend to day-to-day operations and long-term strategy development while the passive investors collect their share of profits from rent and sales.  Busy professionals in particular benefit from this system. They gain a viable way to put their money to work for them and enjoy a steady income stream from rent collection.
Tax Advantages for Passive Income
Any individual's income and investment portfolio affects their tax filings, but real estate investing generally qualifies for beneficial tax treatment. Overall, the U.S. tax code seeks to promote investments in housing. Investors often have opportunities to write off part of a property's value due to depreciation. In some situations, the process of bonus depreciation and cost segregation enables a tax break for future depreciation. 
Apartment investors in particular have access to tax benefits on their passive income. The tax code allows them to delay taxes at certain times or in some circumstances avoid some taxation completely. This advantage applies specifically to passive income generated for passive investors in multi-family real estate. 
The Internal Revenue Service defines passive income as money earned by people who are not "materially involved" in the running of the enterprise that paid them. A passive investor in an apartment building will essentially be "hands off" and meet the IRS definition of being a silent partner or investor in a real estate operation run by full-time professionals. 
Excellent Alternative to the Stock Market
Financial advisors have long recommended real estate as a stable method for diversifying assets beyond stock investments. Although real estate is not as immediately liquid as a stock that can be traded the next business day, it possesses advantages over stocks. Chief among these advantages is a strong potential for producing higher returns than the stock market over the long term.
An analysis of returns dating back to 1996 that compared the S&P 500 to the Vanguard Real Estate ETF revealed a substantial difference. At the 20-year comparison point, the real estate fund had returns of 619.7% versus returns of 213.1% for the S&P 500.  In this analysis, the S&P 500 and the Vanguard fund served as reasonable proxies for stocks versus real estate performance.
At the end of the day, passively investing in apartments leaves investors with an ownership portion of a real asset. Multi-family housing is not vulnerable to paradigm-shifting technologies that can make a previously successful public company flounder, such as happened to BlackBerry and famously Kodak film. Stock investments have a greater risk of experiencing hits from unanticipated market changes. Real estate, particularly housing, does not face the chance of being replaced in the market by something else.
  https://www.biggerpockets.com/member-blogs/9266/90212-benefits-of-passive-real-estate-investing
  https://cepmultifamily.com/passive-income-multifamily-investments/
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Investors anticipate steady demand for multifamily housing
In an environment filled with uncertainty, multifamily housing continues to attract real estate investors. Apartment buildings possess characteristics that insulate them from the societal shifts threatening the office and retail real estate sectors. Remote workforce trends and online shopping do not change the fact that people need places to live.
Add in a low supply of largely unaffordable single-family homes, and investors increasingly view multifamily housing as a viable opportunity for healthy returns. In fact, those who control large amounts of capital have not been shy about investing in apartments.
Financing remains available for housing
Housing shortages throughout the country have made lenders and governments receptive to new housing projects or renovations of existing properties. A look at recent multifamily deals illustrates the money that is on the table. In November 2020, Bain Capital Real Estate and Magnolia Capital announced their intention to invest over $900 million in multifamily properties across the United States.  This joint venture identified apartment complexes catering to middle-income residents as a particular area of opportunity.
The year closed out with other multifamily deals from large players. For example, CapitaLand out of Singapore and an Austin, Texas, organization plan a $300 million joint venture for the acquisition and development of multifamily properties in both the Southeast and Southwest. Additionally, the private equity real estate company Turner Impact Capital has committed $350 million to buying nearly 10,000 units. 
Inflation expected to raise CRE values
It is no secret that the government has been injecting large amounts of money into the economy as a stimulus to counter pandemic economic disruptions. Fears of inflation naturally follow such acts, but this time economists predict that inflation will affect commercial real estate and other assets more than consumer goods.
One-time Wharton professor Peter Linneman, speaking in a Walker & Dunlop Walker Webcast, explained that large portions of stimulus funds have gone to huge entities like JPMorgan and Goldman Sachs, who then invest in assets. They make moves in the hundreds of millions of dollars, which results in lifting the value of assets due to more money being in the system. 
Affordability issues keep people in multifamily housing
Multifamily housing investments rely on renters, and economic realities appear to almost guarantee a strong supply of renters for years to come. Although many people would like to buy a home, they end up renting because their incomes cannot support a home purchase. The Washington Post reported that home prices nationwide rose a minimum of 10% in the fourth quarter of 2020. According to data from Attom Data Solutions, home affordability declined across multiple markets in 2020 compared to the same period in 2019. 
Multifamily properties showed strong performance in 2020
The past does not always equal the future, but any sector that did well in turbulent 2020 possesses resilient qualities. The head of investment sales at the commercial mortgage servicer Berkadia said that multifamily properties produced $122 billion in transactions in 2020. This made it the number one commercial real estate sector. Industrial property ranked second at a considerably lower $86 billion in transactions. 
Positive long-term forecast
The traditional view that multifamily housing can provide consistent returns remains true in a changing world. Private capital has shown a clear interest in investing in apartments due to a large segment of the population being priced out of single family homes. Additionally, the possibility that inflation could swell the value of assets provides investors with a reason to act soon.
Overall, the basic function of multifamily housing removes it from concerns that can trouble other forms of commercial real estate. New technologies can disrupt the profitability of industrial tenants. Changing consumer habits and rising overhead costs continue to plague retail operators. However, at the end of the day, many people will continue to live in apartments.
  https://www.multihousingnews.com/post/the-top-multifamily-stories-of-2020/