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Beyond the Yield: How We Evaluate Risk in Private Real Estate

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September 2026 | Bilyk Financial Private Client

Private real estate has become an increasingly important part of the conversation for Canadian investors looking beyond traditional stocks and bonds.

But the question we believe investors should be asking isn’t simply, “What return does it offer?”

A better question is:

“What risks am I taking to earn that return?”

Dylan Bredo, CFA, MBA, Partner and Portfolio Manager at Bilyk Financial Private Client, recently joined Wealth Professional Canada for a roundtable discussion alongside representatives from Pier 4 and fellow portfolio manager John De Goey.

The conversation focused on how advisors evaluate private real estate, the risks investors should understand, and how the opportunity set has evolved following several challenging years for the asset class.

The discussion reinforced a principle that applies well beyond real estate:

A quality asset class does not automatically make every investment within that asset class a quality investment.

Why Private Real Estate Can Belong in a Portfolio

At Bilyk Financial, we don’t look at private real estate in isolation.

We start with the portfolio.

The objective of diversification is not simply to own more investments. It is to combine investments with different return drivers so that the overall portfolio can potentially achieve a better balance between risk and return.

Private real estate can help serve that purpose because its return drivers differ from those of publicly traded equities and fixed income.

It may also provide an ongoing source of income.

For investors drawing from their portfolios, rental distributions can contribute toward cash-flow requirements. For investors who are still accumulating wealth, those distributions can potentially be reinvested elsewhere in the portfolio.

But diversification alone isn’t enough to justify an investment.

Once we determine that an asset class may have a role within a portfolio, the more difficult work begins.

Start With the Asset. Then Evaluate the Manager.

During the Wealth Professional discussion, Dylan summarized one of the core principles behind our approach:

“The two most important things for us, in any space, is we want to find a quality asset with a quality manager.”

Those two elements need to exist together.

An attractive property portfolio can still be undermined by excessive leverage, poor capital allocation, aggressive valuations or weak liquidity management.

Likewise, a capable management team cannot overcome poor underlying economics indefinitely.

When evaluating a private real estate investment, we therefore want to understand both sides of the equation.

Is the Underlying Real Estate Attractive?

That means examining factors such as:

  • Property location
  • Occupancy levels
  • Rental demand
  • Acquisition cost
  • Replacement cost
  • Potential growth in net operating income
  • Current rents compared with market rents

Is the Manager Financially Disciplined?

We also want to understand how management operates the portfolio and allocates investor capital.

That includes looking at:

  • How the portfolio is financed
  • The amount and structure of leverage
  • How properties are valued
  • How distributions are funded
  • How liquidity is managed
  • How management has performed through different market environments

The past several years have provided a particularly useful stress test for real estate managers.

Leverage Matters

Real estate and debt are closely connected.

That makes leverage one of the first areas investors should understand when evaluating a private real estate strategy.

Loan-to-value ratios can provide an indication of how aggressively a portfolio has been financed, but the headline number should never be viewed in isolation.

Investors should also consider:

  • The cost of the debt
  • When that debt matures
  • Whether borrowing costs are fixed or floating
  • Interest coverage
  • The manager’s ability to refinance
  • Whether operating income comfortably supports financing costs

A portfolio with sensible leverage and well-structured debt may be considerably better positioned to navigate difficult markets than one relying on refinancing or continually rising property values to support its balance sheet.

When interest rates rose rapidly, that distinction became much more visible.

Understand How the Properties Are Valued

One important difference between public and private investments is how frequently prices change.

A publicly traded REIT receives a market price continuously throughout the trading day.

A private real estate investment may instead rely on periodic property appraisals and valuation methodologies.

That does not inherently make one approach superior to the other, but it does make understanding the valuation process essential.

Some of the questions we want answered include:

  • Who performs the valuation?
  • How frequently are valuations completed?
  • Are independent third-party appraisals used?
  • What capitalization rates are being applied?
  • How do those assumptions compare with actual transactions involving similar properties?
  • How conservative are the underlying assumptions?

A portfolio appearing less volatile because it is priced less frequently should not be confused with a portfolio containing no economic risk.

The underlying assets still move in value.

Liquidity Is a Feature — and a Trade-Off

Liquidity has become one of the biggest topics in private markets.

Investors need to understand that private investments generally do not offer the same ability to sell immediately that publicly traded securities do.

Before investing, it is important to understand:

  • Redemption schedules
  • Notice periods
  • Available liquidity
  • Redemption limits
  • Potential gating provisions
  • The circumstances under which withdrawals could be delayed

That does not necessarily make illiquidity bad.

Long-term capital can sometimes benefit from not being forced to respond to daily market movements.

But the investment has to match the investor.

Capital that could be needed unexpectedly should not be placed into a structure where accessing it may be difficult.

This is why we view liquidity at the portfolio level, not simply at the individual investment level.

Look Beyond the Distribution

A high distribution can be attractive.

It can also become a distraction.

Instead of beginning with yield, we want to understand the economic engine supporting it.

Some of the metrics that can help include:

Loan-to-Value

How much debt supports the portfolio relative to the value of its underlying properties?

Interest Coverage

Does operating income comfortably support the portfolio’s financing costs?

Payout Ratio

How much of the available cash flow is being distributed to investors?

Same-Store Net Operating Income Growth

Are existing properties becoming more profitable without relying solely on new acquisitions?

Gap-to-Market

How do current rents compare with prevailing market rents?

Capitalization Rates

What assumptions are being used to establish property values, and are those assumptions reasonable in the current market?

Cost Per Door

For residential assets, how does the implied value of each unit compare with comparable transactions and the cost of constructing new supply?

No individual metric provides the complete answer.

Together, however, they can tell a much more complete story than the distribution rate alone.

Governance Matters Too

Numbers are only as useful as the process behind them.

Independent boards, credible auditors, third-party valuations and transparent reporting can all become important components of due diligence.

The less frequently an investment is priced by an open market, the more important we believe those checks and balances become.

We want to understand not simply the reported value of an investment, but how that value was determined.

Has the Opportunity in Real Estate Improved?

The rapid increase in interest rates put meaningful pressure on many parts of the real estate market.

Capitalization rates moved higher, financing became more expensive and investors reassessed how much they were willing to pay for properties.

While that environment created challenges for existing property owners, it can also create opportunities for investors deploying new capital.

In certain situations, assets can now be acquired at valuations that are more attractive than those available several years ago.

That doesn’t mean every real estate investment is attractive today.

It means valuation once again matters.

For long-term investors, periods of stress can sometimes create the conditions under which disciplined managers are able to acquire high-quality assets on more favourable terms.

The Bilyk Financial Approach to Alternative Investments

At Bilyk Financial Private Client, we think about portfolio construction in much the same way large pension plans and institutional investors do.

Rather than asking which single investment will perform best, we ask how different assets can work together.

Public equities, fixed income, real estate and other alternative investments can each serve different purposes within a properly constructed portfolio.

The objective is not complexity for complexity’s sake.

It is to build portfolios where every allocation has a reason for being there.

When it comes to private real estate, that means looking beyond the advertised return and asking harder questions about:

  • The underlying properties
  • The quality of the manager
  • The balance sheet
  • Leverage
  • Liquidity
  • The valuation process
  • Governance
  • How the investment fits within the client’s broader portfolio

Because whether we’re evaluating real estate or any other investment, our philosophy remains the same:

Start with a quality asset. Partner with a quality manager. Understand the risk. Then determine where — and whether — it belongs in the portfolio.

Read the Full Wealth Professional Discussion

Dylan Bredo, CFA, MBA, recently joined Wealth Professional Canada and Pier 4 for a broader discussion on evaluating risk in private real estate.

Read the full Wealth Professional article: “How Pier 4 Reads Risk in Real Estate” →

Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through ACPI or Bilyk Financial Private Client, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Bilyk Financial Private Client and covered by the CIPF. Financial planning and insurance services are provided through Bilyk Financial Wealth Management. Bilyk Financial Wealth Management is an independent company separate and distinct from ACPI/Bilyk Financial Private Client.