How Do You Diversify a Real Estate Portfolio Across Asset Classes and Capital Stack?

Real estate investors often wonder how to build wealth beyond single-family rentals and traditional buy-and-hold strategies. The secret isn’t just diversifying across property types—it’s about strategically positioning yourself across different asset classes AND different layers of the capital stack to maximize returns while managing risk through varying market cycles.

Quick Answer: The Smart Diversification Strategy

To effectively diversify a real estate portfolio, combine investments across multiple asset classes (multifamily, self-storage, car washes, hotels) with strategic positioning in different capital stack layers (common equity, preferred equity, senior debt, promissory notes). This approach reduces concentration risk, provides multiple income streams, and allows you to capitalize on opportunities regardless of market conditions.

Why Should Real Estate Investors Diversify Beyond Residential Properties?

Whitney Elkins-Hutten, Director of Investor Education at PassiveInvesting.com and author of Money for Tomorrow, learned this lesson through 24 years of hands-on investing. Starting with an accidental house hack that netted her a $52K tax-free profit, she eventually scaled to a portfolio including 40 single-family rentals, multifamily assets, self-storage, and 30 express car washes.

“I was really good at doing residential real estate,” Whitney explains. “My highest and best use of the time is to stay focused on what it is I’m really good at and then find other people to invest through or to partner with to take down these other deals.”

This philosophy represents a fundamental shift in how sophisticated investors approach portfolio construction. Rather than trying to master every asset class personally, successful real estate investors focus on their strengths while gaining exposure to other sectors through passive investments or strategic partnerships.

The Reality of Asset Class Correlation

While conventional wisdom suggests different real estate assets cycle independently, recent market conditions have challenged this assumption. As Whitney notes: “We would like to think all these assets cycle opposite of each other, which they do a little bit. The last three years probably has not proven that theorem to be true because all of them are exposed to interest rates raising, tax increases, insurance increases.”

This insight is crucial for investors who assumed diversification across property types alone would protect them. The 2022-2024 period demonstrated that macro factors like interest rates can impact all real estate simultaneously.

However, diversification still provides value through operational differences and demand drivers. Self-storage typically experiences different occupancy patterns than multifamily. Car washes serve different customer needs than hotels. Understanding these nuances helps investors weather market volatility more effectively.

What Is Capital Stack Diversification and Why Does It Matter?

This is where Whitney’s strategy becomes particularly sophisticated. Beyond asset class diversification, she emphasizes diversifying across the capital stack—the different layers of financing and equity in a real estate deal.

“Where I’ve really been focused on in the past three years is not just diversifying asset classes, but my investments in the different layers of the capital stack,” Whitney explains. “As opposed to going to all equity deals across different asset classes and being all in the common equity class, who is highest risk, highest reward.”

Understanding the Capital Stack Layers

The capital stack typically consists of four main layers, ranked from least risky to most risky:

1. Senior Debt – First position loans secured by the property, lowest risk, lowest returns (typically 8-12%)
2. Mezzanine Debt/Junior Debt – Second position loans, moderate risk and returns
3. Preferred Equity – Equity position with priority over common equity, fixed returns before profit splits
4. Common Equity – Highest risk, highest potential returns, first to lose money if deals underperform

Whitney’s current strategy emphasizes debt positions: “Debt is still making cash hand over fist. Premiums are still at a command in specific types of debt structures. Hard money lending is kind of where I’m sitting at right now.”

This approach offers several advantages in the current market environment. Hard money lending to fix-and-flip investors provides strong cash flow, relatively short loan terms (typically 6-18 months), and asset-backed security. More importantly, it keeps capital liquid and flexible.

“That way I can continue to build cashflow. I can allow it to compound. So I get some equity growth there. I’m remaining liquid and flexible that way when I do find the next equity deal, I’m ready to pounce,” Whitney notes.

This strategy acknowledges market timing without trying to perfectly predict bottoms or tops. By maintaining liquid debt positions, investors can shift to equity when valuations become attractive while earning strong returns in the interim.

For investors interested in building passive income streams, understanding capital stack positioning is essential to constructing a portfolio that performs across different market conditions.

How Do You Successfully Invest in Alternative Assets Like Car Washes?

Whitney’s portfolio includes 30 express car wash locations, primarily in the Southeast United States. This unconventional asset class demonstrates how diversification can extend beyond traditional real estate.

“We got into car washes as a cashflow play and a diversification play for our investors,” Whitney explains. The company both acquires existing locations from mom-and-pop operators and develops ground-up construction projects.

The Car Wash Underwriting Process

Unlike multifamily properties valued on cap rates, car washes trade on EBITDA multiples. “We’re buying based on a multiple of EBITDA, which is kind of like net operating income in multifamily real estate,” Whitney notes. “We’ll pay somewhere between seven to 10 [times] earnings before depreciation, interest taxes, insurance and amortization.”

This valuation methodology is common in operating businesses rather than pure real estate plays, highlighting how alternative assets require different analytical frameworks.

Location analysis for car washes focuses on specific criteria:

• Traffic counts: Minimum 20,000 cars passing daily
• Accessibility: Right-hand turn access is critical
• Saturday morning pattern: Proximity to grocery stores, dry cleaners, and other errand destinations
• Market positioning: Secondary and tertiary markets with less competition than oversaturated primary markets
• Operational efficiency: Express car washes can process 450-500 cars daily with just 2-3 full-time employees

“You want to be in the Saturday morning pattern of people running errands, going to the cleaners, grocery store, all that sort of thing,” Whitney explains.

The efficiency advantage is substantial. With labor as the number one controllable expense in cash-flowing businesses, minimizing headcount while maximizing throughput creates significant profit margins.

For investors exploring commercial real estate opportunities, understanding how operating businesses differ from traditional investment properties opens doors to less competitive niches.

What Are the Key Differences Between Active and Passive Real Estate Investing?

Whitney’s journey illustrates the evolution many investors experience. After actively scaling 40 single-family rentals and serving as a general partner on 10 multifamily assets, she strategically shifted more capital toward passive investments.

“I said yes to both and helped scale a private equity firm,” Whitney recalls. “At the same time, really doubled down on scaling my passive portfolio.”

When Does Passive Investing Make More Sense?

The decision between active and passive investing isn’t just about time—it’s about highest and best use of your skills and capital.

Active investing makes sense when:

• You have specific expertise in an asset class or market
• You can add value through operations, development, or repositioning
• You have the time and infrastructure to manage investments directly
• You’re building a portfolio in your area of mastery

Passive investing becomes attractive when:

• Diversifying beyond your core competency
• You lack time for additional active projects
• You want exposure to markets or asset classes outside your expertise
• Tax benefits like depreciation can shelter active income
• You’re seeking stable cash flow without management responsibilities

Whitney discovered passive investing’s power particularly through tax advantages: “I saw the power of doing it outside of my retirement accounts and using depreciation to shelter income.”

This revelation is critical for high-income earners. Real estate depreciation from passive syndication investments can offset W-2 income or business income, providing substantial tax savings while building equity.

Many investors start with turnkey rental properties as their first passive investment before graduating to syndications and private equity funds.

How Should Investors Evaluate Hard Money Lending Opportunities?

With many operators launching debt funds in recent years, Whitney’s team has been lending since 2020, with one managing partner originating hard money loans since 2004-2005. This experience matters when evaluating fund sponsors.

“Just like anything else, you have to evaluate the operator’s track record background and experience in that type of investment,” Whitney cautions. “Everybody and their mother opening up a debt fund may not be a good thing.”

What Makes a Quality Hard Money Fund?

Whitney’s fund focuses specifically on residential fix-and-flip projects in the Carolinas—three-bedroom, one-bath or three-bedroom, two-bath “Plain Jane, super conservative investments.” They avoid riskier construction projects like build-to-rent or ground-up multifamily.

Default rates serve as a key performance indicator:

• Large institutional lenders: 3-10% default rates
• Quality local lenders: Under 2%, ideally closer to 1%

“If you’re going to be investing in a fund and it’s a local lender, their default rate better be down under 2% or if not closer to 1%,” Whitney emphasizes.

This difference stems from intimate market knowledge. “They can look at an address on an application and they’ll be like, ‘Yeah, we did three deals around the corner in the past two years.'”

Why Are Hard Money Rates Still Attractive?

Borrowers remain relatively price-insensitive to hard money rates because differentiation happens through speed and service rather than pricing alone.

“All the different funds are fairly competitive on rate and origination points and fees,” Whitney explains. “How do they differentiate? It’s their ability to close incredibly fast in their customer service.”

For fix-and-flip investors who’ve identified a time-sensitive deal, paying 12-14% interest is worthwhile if they can close in days rather than weeks. The opportunity cost of losing the deal far exceeds the marginal rate differential between lenders.

Investors exploring off-market deals often need hard money to move quickly on opportunities before competitors can act.

What Are the Biggest Mistakes Investors Make When Diversifying?

Whitney’s 24-year journey includes plenty of learning experiences that offer cautionary lessons for investors building diversified portfolios.

The Raccoon Incident: The Importance of Verification

During one flip project, the roofing contractor failed to properly close the soffits before a weekend. Raccoons took up residence in the house. After removing them and completing the roof, the contractor again failed to fully seal the soffits.

“Raccoons loved to party, they came back,” Whitney recalls with a laugh. “We had just hung all new drywall in the house. So got to do that twice.”

The lesson? “I should have had the contractor take a video and walk around the house or had my property manager go out there and double confirm.”

This principle applies across all investment types—trust, but verify. Whether you’re passive or active, having systems to confirm critical tasks are completed properly saves money and headaches.

The Hidden Plumbing Disaster

On a two-unit property they still hold, multiple challenges emerged. The most costly? A shower that had been draining into the crawl space for 10 years because the plumbing was never reconnected after a previous renovation.

“The person who signed off on the [certificate of occupancy] never went under,” Whitney explains. “They all took the original plumber’s word that it had been put back together.”

When they discovered the issue while installing a new boiler, they had to remediate what appeared to be black mold (which turned out to be wet soil) and completely reroute the plumbing.

The inspector they hired for their purchase never caught it either—a reminder that third-party professionals aren’t infallible. Whitney could fit in the crawl space while her husband couldn’t, which likely explained why multiple people skipped the inspection.

For investors considering house flipping, comprehensive property inspections—including difficult-to-access areas—can save thousands in unexpected repairs.

Which Markets Offer the Best Diversification Opportunities in 2025?

While Whitney emphasizes that strategy matters more than geography, her team focuses heavily on the Carolinas for good reason.

“I’m still really excited about North Carolina and South Carolina,” Whitney shares. “Not because that’s where our company is from, but there’s just macro economics, the movement of business into those major metropolitan service areas.”

Why the Carolinas Represent Strong Long-Term Tailwinds

Several factors make the Carolinas attractive for diversified real estate investing:

1. Business relocation: Major companies continue moving operations to Charlotte, Raleigh, Charleston, and other metros
2. Population growth: These markets consistently rank among the fastest-growing in the nation
3. Favorable business climate: Lower taxes and less regulation attract employers
4. Diverse employment base: Not overly dependent on any single industry
5. Climate and lifestyle: Attracts both businesses and workers from higher-cost, colder markets

“That’s a tailwind that people can ride for quite a long time,” Whitney notes.

However, she cautions against blindly chasing hot markets: “That is not how I operate. I would say states [rather than specific metros].”

This state-level focus acknowledges that within any state, multiple markets may offer opportunities while others become overheated. The Carolinas offer numerous secondary and tertiary markets with room for growth beyond the primary metros everyone targets.

For investors exploring multifamily opportunities, understanding macro migration patterns helps identify markets with sustainable long-term demand.

How Can Beginning Investors Start Building a Diversified Portfolio?

Whitney’s origin story offers an accessible blueprint for new investors. Her first investment was “completely by accident”—buying a house with a significant other who handled rehab work while she provided financing through her public health job.

After the relationship ended a month later, she faced a partially demolished property she couldn’t afford alone. Her solution? “I stuffed that property full of roommates because I couldn’t pay the bills on my own.”

The House Hacking Advantage

By filling the house with people who didn’t mind living in a construction zone and were willing to trade labor for reduced rent, Whitney discovered something powerful: “My roommates covered everything [all expenses]. And that’s where the light bulb went on for me.”

When she sold 11 months later, she walked away with a $52,000 tax-free check thanks to the Section 121 exclusion—and realized she’d made more on nights and weekends than at her demanding full-time job.

This house-hacking strategy remains one of the most accessible entry points for new investors. By living in the property, you can:

• Qualify for owner-occupied financing with lower down payments
• Learn landlording on a small scale
• Build equity while others pay your mortgage
• Eventually convert to a rental when you move to your next property

“I continue to live-in flip house hack,” Whitney explains. Over time, she and her husband scaled to 40 single-family rentals using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat).

For those just starting out, exploring seller financing can make early deals more accessible when traditional lending proves challenging.

What Role Does Education Play in Successful Diversification?

When asked what advice she’d give her younger self, Whitney immediately referenced reading materials: “I would hand her my book. But also my realtor had given me Rich Dad Poor Dad and I read like the first couple of chapters, thought I had it all mastered and I put it down.”

She later changed her answer: “Let me change that. I would actually have her read Cashflow Quadrant. I have an operational brain, so you start telling me stories and I might go to sleep and check out. But Cashflow Quadrant—that would have probably hit home for sure.”

The Importance of Complete Education

Whitney’s experience illustrates a common mistake—consuming just enough education to feel confident while missing critical concepts. Her second deal “totally proved that I did not read that book cover to cover.”

Robert Kiyosaki’s Cashflow Quadrant divides income earners into four categories:

• E – Employees (trading time for money)
• S – Self-employed (own a job)
• B – Business owners (systems work for them)
• I – Investors (money works for them)

Understanding these distinctions helps investors structure their portfolios and business activities strategically. Many real estate investors unknowingly operate in the S quadrant (essentially self-employed) when they could be building B quadrant businesses and I quadrant investments.

Whitney also recommends The One Thing by Gary Keller, which aligns with her philosophy of focusing on what you do best while delegating or partnering for the rest.

For operational-minded investors, attending the right conferences and reading systematically builds the frameworks needed for sophisticated portfolio construction.

How Should Investors Use Technology and AI to Scale Their Portfolios?

As Director of Investor Education at PassiveInvesting.com, Whitney leverages AI extensively in content creation—but in a thoughtful way that maintains authenticity.

“I use AI for all my content, but the content is 100% me,” Whitney explains. “You’re not getting some AI slap or chat bot that generated something. It’s all me. It’s coming from my head.”

The CRIT Method for AI-Assisted Content

Whitney follows a framework from Jeff Waller’s book The AI Driven Leader, using the CRIT acronym:

• C – Context: Explain what you’re trying to accomplish
• R – Role: Define the AI’s role (editor, social media producer, etc.)
• I – Interview: “Ask me questions one at a time for clarity and context” (limit to 3-5 questions to avoid rabbit holes)
• T – Task: Specify the desired output

“The first thing you’re going to say is, here’s the context. This is what I’m trying to do,” Whitney explains. “Then you’re going to say interview me and ask me questions one at a time for clarity and context.”

This approach extracts the investor’s genuine knowledge and insights rather than generating generic content. The AI serves as an interviewer and organizer, but the substance comes from the expert’s experience.

For investors managing multiple properties or seeking to scale their operations, AI tools can handle repetitive tasks while preserving the strategic thinking only humans can provide.

What Should Passive Investors Look for When Vetting Opportunities?

Whitney’s website, PassiveInvestingWithWhitney.com, reflects her educational mission: “My goal in life is to help investors take their active income and savings and turn it into passive income and long-term wealth.”

When evaluating passive investments, she emphasizes several critical factors:

Operator Track Record and Specialization

“You have to evaluate the operator’s track record background and experience in that type of investment,” Whitney stresses. This applies whether you’re investing in equity syndications or debt funds.

Key questions to ask:

• How many full market cycles has the operator experienced?
• What’s their performance record across different market conditions?
• Do they specialize in this asset class or are they generalists?
• How transparent are they with investors during challenges?

Alignment of Interests

Quality operators invest their own capital alongside limited partners, ensuring aligned incentives. They should also have meaningful “skin in the game” beyond just the general partner equity.

Market Knowledge and Local Expertise

Whitney’s hard money fund succeeds partly because the team knows their markets intimately. “They can look at an address on an application and they’ll be like, ‘Yeah, we did three deals around the corner in the past two years.'”

This local knowledge reduces risk and improves underwriting accuracy—whether you’re lending money or buying properties.

Communication and Education

Sponsors who invest in investor education demonstrate long-term thinking. They’re building relationships, not just raising capital for the next deal.

“We can jump on a one-on-one call together and understand your investing goals,” Whitney offers. “We also will send you some free education, probably more than you ever wanted to know.”

For investors exploring syndication opportunities, thorough due diligence on sponsors matters as much as property-level underwriting.

Key Takeaways: Building a Resilient, Diversified Real Estate Portfolio

Whitney Elkins-Hutten’s 24-year journey from accidental house hacker to director of a $1.4 billion private equity firm offers valuable lessons for investors at every level.

Portfolio diversification in real estate requires three dimensions:

1. Asset class diversity – Spread investments across residential, commercial, and alternative assets with different demand drivers and cycle patterns
2. Capital stack positioning – Balance high-risk equity positions with lower-risk debt investments to maintain cash flow and flexibility across market conditions
3. Geographic focus – Rather than chasing every hot market, develop deep expertise in states or regions with long-term macro tailwinds

The active-passive balance evolves over time. Begin with hands-on investments in your area of expertise, then selectively add passive investments for diversification beyond your core competency. Use passive investments to access markets, asset classes, and deal sizes you couldn’t pursue actively.

Current market opportunities favor flexibility. With hard money lending offering strong cash-on-cash returns while maintaining liquidity, debt positions allow investors to earn while staying ready to deploy into equity when valuations become attractive.

Education and verification systems prevent expensive mistakes. Reading books cover-to-cover, implementing confirmation processes for contractors, and thoroughly vetting passive investment sponsors saves far more than it costs.

Leverage your highest and best use. Master one investment strategy deeply rather than dabbling in many. Access other opportunities through partnerships, passive investments, or joint ventures with specialists.

For investors committed to building lasting wealth through real estate, diversification isn’t optional—it’s essential. But thoughtful diversification across assets, capital layers, and investment structures beats random diversification every time.

Want to learn more about the REI Club Podcast? Click here: https://www.therealestateinvestingclub.com

Want to grow your business with ads? Join our sister company here: https://www.kaizenmarketingagency.com

Want to invest in Gabe’s next deal? Click here: https://www.kaizenpropertiesusa.com

Want to join our community of active investors? Click here: https://linktr.ee/gabepetersen