The barbell strategy proposes building a portfolio with two clearly differentiated blocks: one aimed at offering greater predictability and lower relative risk, and another that assumes more uncertainty in exchange for higher return potential.
Applied to real estate investment, this logic can be translated into combining debt projects and equity transactions. Debt can provide greater contractual visibility over interest, terms and payment priority. Equity, meanwhile, allows investors to participate directly in the outcome of the project and benefit from a potential higher revaluation.
But the key lies in the nuance: a portfolio is not barbell simply because it mixes debt and equity. For the strategy to make sense, each block must fulfil a different function and the overall portfolio must fit the investor’s horizon, liquidity and ability to assume losses.
What a barbell strategy really is
The name comes from the shape of a weightlifting bar: two weighted ends and a much lighter middle section.
Translated into investment, it means avoiding excessive concentration in intermediate-risk assets and separating the functions of each part of the portfolio more clearly. One block seeks to limit uncertainty and provide greater predictability; the other accepts higher risk in order to aim for potentially higher returns.
This does not mean that medium-risk investments are necessarily bad. The logic of the strategy consists of asking what each investment contributes to the whole and avoiding positions that do not clearly improve either relative protection or return potential.
In real estate, this separation can be particularly useful because debt and equity have very different return profiles and payment priority.
Debt and equity: two different ways to participate in a project
In a debt project, the investor finances a loan granted to a developer. They usually know in advance:
- the interest rate;
- the contractual term;
- the repayment method;
- and the payment position compared with the developer’s capital and equity investors.
This greater contractual visibility may allow certain debt transactions to fit into the more defensive block of a barbell strategy.
However, the agreed interest does not guarantee the outcome. Actual payment depends on the borrower being able to repay the loan under the expected conditions.
In equity, by contrast, the investor participates in the final result of the transaction. Their return depends on variables such as:
- acquisition and construction costs;
- execution timeframe;
- sale prices;
- financing;
- and the final value of the project.
If the transaction exceeds expectations, equity can capture a larger share of the profit. If the result deteriorates, it also absorbs the decline in residual value first, since debt has payment priority according to its ranking.
That is why, within a barbell, equity usually occupies the block with higher relative risk and higher revaluation potential.
Not all debt is defensive and not all equity has the same risk
Automatically classifying all debt as conservative and all equity as aggressive would be an oversimplification.
There are important differences within debt. A senior transaction with a first-ranking mortgage guarantee, a moderate level of leverage and a clear repayment source may have a very different profile from subordinated debt or debt dependent on future refinancing.
To analyse the debt block, it is advisable to review, among other factors:
- payment ranking;
- guarantees;
- loan-to-value or loan-to-cost ratio;
- repayment source;
- progress of the transaction;
- developer solvency;
- and term.
There are also relevant differences between equity projects. A development that is almost completed and has a high level of sales does not present the same risk as an early-stage transaction, with greater execution and sales uncertainty.
In addition, the project’s internal leverage matters. Two equity transactions with a similar target return may have very different profiles if one depends much more heavily on bank financing.
The debt or equity label is therefore only the first level of analysis.
How to build a real estate barbell step by step
Before allocating percentages between debt and equity, it is worth answering more basic questions.
1. Define the objective
Are you mainly looking to preserve capital, obtain medium-term returns or maximise growth? The function of the real estate block should be clear before selecting projects.
2. Decide the horizon
Timelines matter especially in illiquid investments. A debt transaction may have a relatively defined contractual maturity, while an equity project usually depends on execution and subsequent exit.
In both cases, delays may occur.
3. Calculate the liquidity you need
The money allocated to these investments should be able to remain committed for the expected term and for possible extensions.
4. Place real estate within your overall wealth
The barbell should not be analysed in isolation.
An investor may have real estate debt and equity while also owning a main residence, funds, shares, fixed income or liquidity. Therefore, an 80/20 allocation within a platform does not mean that their entire wealth has that same risk profile.
5. Assign functions to each block
Only then does it make sense to decide what proportion will go to the side with greater predictability and what proportion to the side with higher return potential.
There is no universal percentage.
Allocation examples, not recommendations
A portfolio could allocate 80% of its real estate block to debt and 20% to equity. Another could assume more uncertainty with a 60/40 split.
Intermediate combinations could also be used.
These percentages serve only to visualise the logic of the strategy. They do not automatically define a conservative, moderate or dynamic profile.
Suitability depends on:
- the specific quality of the transactions;
- total wealth;
- available liquidity;
- timeframe;
- and the ability to assume losses.
Subordinated debt with high leverage may involve more risk than certain advanced-stage equity transactions. That is why the percentage alone says little if what lies inside each block is not analysed.
Diversify within each side too
Combining debt and equity diversifies the risk structure, but it does not eliminate other common factors.
Within debt, it may be useful to spread exposure across:
- different developers;
- terms;
- rankings;
- guarantees;
- locations;
- asset types;
- and repayment sources.
In equity, diversification can be achieved across:
- developments at different stages;
- locations;
- developers;
- residential and other uses;
- refurbishment;
- repositioning;
- or different value creation strategies.
It is also advisable to stagger investment and maturity dates.
The aim is to avoid all capital depending on the same market moment or a single real estate thesis.
Debt and equity may share the same risks
A barbell strategy does not eliminate the correlation between the two blocks.
A debt project and an equity project may still depend on common factors:
- evolution of housing prices;
- buyer demand;
- access to financing;
- construction costs;
- developer capacity;
- or the economic situation of the same area.
That is why combining debt and equity is not a substitute for diversification by geography, developer, term or type of transaction.
What does change is the contractual position and the way each investment participates in the results.
For example, if a project sells below expectations, equity absorbs the deterioration in value first. Debt could still be fully recovered if there is enough value to service it. If the transaction significantly exceeds expectations, debt normally maintains the agreed interest, while equity can participate in that additional profit.
How to rebalance an illiquid real estate portfolio
In listed assets, rebalancing may simply consist of selling part of the position that has increased and buying another.
In private real estate investment, that flexibility usually does not exist.
That is why rebalancing is usually carried out through:
- new investments;
- project repayments;
- amortisations;
- and reinvestment of recovered capital.
If the weight of equity has increased beyond the planned range, for example, the next contributions can be temporarily directed towards debt. If several debt transactions mature within a short period, part of the returned capital can be used to rebuild the other block.
It should also be considered that some projects may be delayed or repaid earlier than expected, altering the planned allocation.
A periodic review — for example, every six or twelve months — can be useful to check whether the portfolio still fulfils its function, but any adjustment must respect the illiquidity of the investments.
The label matters less than the function of each investment
The main usefulness of a barbell strategy does not lie in choosing a specific proportion between debt and equity.
It lies in forcing the investor to ask what function each project fulfils within their portfolio.
Debt can provide greater contractual predictability and payment priority. Equity can offer greater participation in value creation. But neither block is risk-free, and both can be affected by the same real estate factors.
That is why a well-built barbell is not simply about mixing categories. It is about combining genuinely different exposures, diversifying within each block and maintaining an allocation that is consistent with wealth, horizon and the ability to assume losses.
