Whether an investor is looking to diversify their portfolio further or develop reliable passive income streams that will continue to prove profitable with time, the real estate market is often the first place that they'll turn to.

That said, this is largely due to the sheer volume of investment possibilities available to those just approaching the real estate market. This can be both exciting and confusing at the same time.

Take, for example, an UPREIT: these valuable investment opportunities provide many advantages to investors who own property. If you have come across the UPREIT structure in your search for real estate investment opportunities, but lack enough information to make an educated decision about them, this is the blog for you!

In today's post, we'll discuss more about what UPREITs are, how they function, and why making the leap might be your smartest investment yet!

Concept of stock market

What Is an UPREIT, and How Does It Work? 

An Umbrella Partnership Real Estate Investment Trust (UPREIT) is essentially a mutual fund in which property owners pool together their property resources in exchange for shares in the operating partnership.

Let's imagine that you currently own a lucrative piece of real estate. It's been steadily gaining in value for years, and you're ready to get a slice of that profit—while ditching the management element. Unfortunately, a traditional sale on this type of property will cost you: get ready to deal with some serious capital gains taxation.

Fortunately, there's a solution: rather than selling and taking a hard tax hit, you can contribute this property to a REIT in exchange for shares. Once you "buy into" the UPREIT structure with real estate, the UPREIT owns the property—as well as the management and administration that comes with it. That's right: you'll never have to deal with late rent, "Professional Tenants," or evictions ever again. Plus, who doesn't love tax deferral?

Team on the peak of mountain


This is a mutual fund, and you receive shares valued based on your contributions to the UPREIT. This means you must remember that these shares will also fluctuate in value based on:

  • How well the collective properties within the UPREIT are managed
  • Market changes and pressures that affect asset-specific REITs
  • The global market trends for a diversified REIT.

It's also important to note that only some property owners will have access to this form of investment: UPREITs are strict on which properties they choose to purchase, as it must contribute value to the overall real estate portfolio. When you think about it, this makes perfect sense: you wouldn't want to purchase a "lemon" property, either!

Although this can seem like a strange investment to make for some, it must be noted that UPREITs come with their own set of attractive incentives for investors who transition their properties into shares.

Is an UPREIT "REIT" for You?

As is the case with most investments, it's important to conduct your research before entrusting your assets to an UPREIT. That said, you may want to consider transforming your properties through an UPREIT if you are looking for one or more of the following benefits: 

Tax Deferrals

If you were to sell your property outright, you would have to deal with the subsequent taxes: a direct sale is a taxable event. In the case of transferring your properties to an UPREIT, this event is not considered taxable under IRC §721. It only becomes a taxable event when you realize capital gains as a result of the sale of your shares in the UPREIT.

Your shares in the operating partnership are not the same as publicly-traded shares—but you can convert them, as needed. For those who may be facing high taxes as a result of property ownership, this is a great way to liquefy assets in smaller portion sizes as needed.

Sprout in hands

Diversified Real Estate

Joining an UPREIT gives you access to a regionally-diverse, well-managed portfolio that would be challenging to accumulate as a solo investor. This can be great for those who are looking for real estate that is managed through a larger entity rather than a portfolio that they develop over time with their investments. As every property investor knows, managing your portfolio of rentals is one of the biggest time sinks there is—and it's time you can never get back. 

Publicly-Traded Stock Upon Conversion

If you feel as though you want—or need—to sell your shares, your operating partnership units can typically be converted into publicly-traded REIT stock—which is far more than liquid than physical property.

While it is important to fully understand the terms of your partnership within the UPREIT of your choosing and to research where these stocks will be made available and how the process works, this is still a very attractive option for those who don't want to go through the difficulty of selling their actual property in return for heavily-taxed funds. 

An UPREIT may not be the best choice for all property owners—and may not even be an option for some who do not have a property that would positively contribute to the overall partnership. However, the UPREIT structure is excellent for those looking to avoid the hefty taxes that come with property sales and the difficulty associated with said process.

If you are looking into joining an UPREIT—but need more information to reach a proper decision—get in touch with the expert investors at The Peak Group! This blog scratches the surface of what an UPREIT can offer your portfolio: when you contact us, we'll be able to help you analyze your portfolio to see if an UPREIT is the "REIT" move for you!

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Posted by The Peak Group on February 27, 2020