Introduction

As traditional 60/40 allocations come under pressure from low yields and higher correlations during market stress, retail investors increasingly consider alternative allocations. Private credit, real assets, and REITs can reduce portfolio volatility, add income, and act as inflation or growth levers—but they are not interchangeable. This guide explains how each works, the benefits and tradeoffs, practical allocation ideas, and the actions I recommend in advisory practice when integrating these vehicles.

Background and why retail interest has grown

  • Private credit expanded after banks retrenched following the 2008 crisis and again during tighter bank lending cycles; non‑bank lenders now fill a meaningful gap in corporate and real‑estate financing. Retail access has widened through public BDCs (business development companies), interval funds, and closed‑end funds.
  • Real assets (real estate, infrastructure, timber, agriculture, and commodities) are sought for inflation protection and diversification because they have intrinsic, tangible value that can appreciate independently of equities.
  • REITs democratize direct real‑estate ownership: listed REITs give daily liquidity and dividend income while private real‑estate funds offer deeper customization and potential lower volatility at the cost of liquidity.

How each alternative works (simple, practical view)

Private credit

  • What it is: Non‑bank lending provided by private funds, BDCs, specialty finance companies, and direct lenders. Loans range from senior secured debt to mezzanine or unitranche structures.
  • How retail investors access it: publicly traded BDCs and specialty lenders, closed‑end mutual funds, interval funds, and some registered private credit ETFs. These vehicles differ in transparency, fees, and liquidity.
  • Typical return and profile: generally higher coupon income than comparable public bonds because of illiquidity premium and borrower credit risk.

Real assets

  • What they include: direct real estate, timberland, farmland, infrastructure (toll roads, utilities), and commodities (gold, oil, industrial metals).
  • How retail investors participate: direct ownership (e.g., buying rental property), private funds, listed equity proxies (infrastructure companies, timber REITs), and commodity ETFs.
  • Role in a portfolio: inflation hedge, income from rents/leases, and diversification due to different drivers of value compared with equities.

REITs

  • What they are: Companies that own or finance income‑producing real estate and generally must distribute at least 90% of taxable income to shareholders to qualify for favorable tax treatment under U.S. tax law (IRS guidance on REITs explains the rules and required income tests).
  • Types: equity REITs (own properties), mortgage REITs (invest in mortgages), and hybrid REITs.
  • Accessibility: listed REITs trade on exchanges like stocks; private REITs and non‑traded REITs exist but are less liquid and often have higher upfront fees.

Benefits—why include these in a retail portfolio

  1. Diversification and lower correlation: Real assets often respond to different economic drivers (supply/demand and physical scarcity) than stocks. Private credit returns are driven by loan yield and credit spreads, not just equity multiples.
  2. Income generation: Many REITs maintain regular dividends; private credit provides coupon income; real assets can produce rental income or harvest revenue (agriculture, timber).
  3. Inflation protection: Leases, commodity prices, and contract escalators can index cash flow to inflation, providing a buffer when purchasing power erodes.
  4. Return enhancement: When selected prudently, alternatives can add an illiquidity or complexity premium—an incremental return above public market equivalents.

Principal risks and tradeoffs

  • Liquidity: Private credit and private real assets are typically illiquid. Interval funds and closed‑end funds have limits on redemptions. Public REITs are liquid but can trade at high volatility during market stress.
  • Complexity and transparency: Private structures offer less public reporting and require more diligence on underwriting, covenants, and asset management.
  • Fees: Management fees, performance fees, and transaction costs can materially reduce net returns. Always compare gross vs. net expected returns.
  • Credit and concentration risk: Private credit lenders often make concentrated loans with limited diversification, increasing idiosyncratic risk.
  • Tax treatment: REIT dividends are often taxed as ordinary income (though a portion may be return of capital or capital gains). Private fund distributions and sale proceeds can generate ordinary income, interest income, or passive income with specific tax reporting—consult the IRS and a tax advisor for your situation (see IRS REIT overview).

Due diligence checklist (quick practical list I use with clients)

  • Understand vehicle structure: public REIT, non‑traded REIT, BDC, interval fund, private LP, direct ownership.
  • Fees and waterfall: explicit fees, carried interest, redemption terms, and any gate provisions.
  • Liquidity terms: redemption frequency, notice periods, transfer restrictions.
  • Underwriting quality: collateral, loan‑to‑value, covenant strength, borrower track record.
  • Management team and alignment: experience, track record, co‑investment by managers.
  • Stress cases: vacancy rates, commodity price shocks, rising rates impact on leverage.
  • Tax and reporting: K‑1 issuance, ordinary vs. qualified income, depreciation and like‑kind rules where applicable.

Practical allocation examples (illustrative, not advice)

  • Conservative/Income‑oriented retiree: 5–10% REITs (liquid listed REITs), 0–5% private credit (BDC exposure), 5–10% direct or listed real assets for income and inflation protection.
  • Growth‑oriented investor (long horizon): 5–15% private credit (to capture yield premium), 10–20% real assets (mix of listed and private), 5–10% REITs as a liquid real‑estate anchor.
  • Core–satellite approach: Keep a low‑cost broad index core (stocks/bonds). Use 10–20% of portfolio as satellite exposure to private credit, real assets, and REITs to pursue income and diversification (see our core–satellite framework for allocation context).

Access routes—how retail investors typically get exposure

  • Publicly traded REITs and BDCs (exchange‑listed) — offer transparency and intra‑day liquidity but are market‑priced.
  • Mutual funds and ETFs that focus on real assets or REITs — lower minimums and daily liquidity.
  • Interval funds and non‑traded closed‑end funds for private credit or private real‑estate exposure — limited redemptions.
  • Direct investment — buying rental property or farmland requires operational capacity and geographic diversification to reduce idiosyncratic risk.

Tax notes and regulatory pointers

  • REIT taxation and distribution rules: The IRS describes the special tax status and distribution requirements for REITs—dividends may be ordinary income, qualified dividends, or return of capital depending on source and holding period.
  • BDCs and SEC oversight: BDCs are overseen by the SEC and come with public reporting obligations; they can be a practical retail gateway to private credit exposure.
  • K‑1s and filing complexity: Many private funds issue Schedule K‑1s that can complicate tax filing and timing; plan for tax preparation needs.

Common mistakes I see and how to avoid them

  • Overpaying for illiquidity: Don’t accept large fees or long lockups without commensurate expected net return.
  • Using alternatives to chase yield without understanding downside: Higher coupon often compensates for credit or liquidity risk—test stress scenarios.
  • Failing to match liquidity needs: Hold sufficient cash or liquid bonds if you own illiquid alternatives.

Interlinking resources on FinHelp

  • For a deeper look at using REITs, see our Real Estate Investment Trust (REIT) glossary entry: Real Estate Investment Trust (REIT).
  • To explore private credit mechanics for retail investors, review Private Credit as a Portfolio Diversifier: What Investors Should Know.
  • For guidance on balancing inflation protection with liquidity, see Real Assets Allocation: Balancing Inflation Protection and Liquidity.

FAQs (brief)

Q: Are private credit and REITs only for wealthy investors?
A: No. Public BDCs, listed REITs, ETFs, and interval funds have opened access for retail investors, though some private funds still require accredited status.

Q: Do REITs protect against inflation?
A: They can help; many REIT leases include escalators or are shorter‑term, allowing rents to reset. However, REIT performance varies by sector (e.g., industrial vs. retail) and interest‑rate environment.

Q: How much should I allocate to alternatives?
A: That depends on goals, horizon, risk tolerance, and liquidity needs. Many investors allocate 5–20% to alternatives within a diversified plan.

Professional tips (from my practice)

  • Start with liquid proxies (listed REITs, commodity ETFs, BDCs) to learn how these assets behave in your portfolio before moving into illiquid private funds.
  • Run scenario analysis: stress test valuations and cash flows under higher rates, vacancy spikes, and commodity price swings.
  • Prioritize manager quality and alignment above chase‑returns—good underwriting is the most reliable source of downside protection.

Disclaimer

This article is educational and not personalized financial advice. It reflects industry practices and my experience working with clients, but you should consult a qualified financial planner or tax professional before making investment decisions. For tax specifics, review IRS guidance on REITs and consult with your tax advisor.

Authoritative sources and further reading