While buying, selling, and managing real estate can be extremely rewarding, there are quite a few details to consider when organizing and optimizing your assets. Namely, one should consider the boost to your portfolio that comes from investing with a group—rather than managing your holdings alone.

There are various tools available to real estate collectives that can be utilized by professional investors to insulate their portfolios and protect investment gains that cannot be accessed on the individual scale.

One such collective is an Umbrella Partnership Real Estate Investment Trust or "UPREIT." When property investors join an UPREIT, they gain access to tools like an UPREIT transaction or 721 exchange. Using an UPREIT transaction, investors can contribute to an investment trust by converting their real estate assets instead of selling the assets for cash.

An UPREIT transaction benefits investors in a number of ways—but let's break down some of the "language barriers" first before we get to the good news!Real estate icon

Let's Break It Down

An understanding of terminology is a practical exercise, and at The Peak Group, we know that a lack of clarity is often a barrier to entry.

Financial freedom should be accessible to every investor—and transparency is half the battle! While the term "UPREIT" may look as if it is from an alien language, the concepts that drive an UPREIT can be more easily digested in their component form.

First Things First: What Is a REIT?

A Real Estate Investment Trust—or "REIT," for short—is a collective entity that owns income-producing real estate. Properties included in a REIT portfolio are either diversified (a mixture of apartment complexes, health care facilities, office buildings, self-storage, and more) or asset-specific (health care vs. office space, for example).

A REIT provides investors the opportunity to own a portion of a much larger real estate pie, which generates dividend-based income. Essentially, purchasing shares in a Real Estate Investment Trust allows an investor to acquire part ownership of real estate based businesses—and gives them access to a portion of the businesses' profits via regular dividend payouts.

Unlike other investment opportunities, a REIT is required to distribute at least 90% of its taxable income from properties back to its investors—which is part of what makes joining one so attractive.

What Is the "UP" in an UPREIT?

The "UP" in UPREIT stands for "Umbrella Partnership." Essentially, an umbrella partnership is the entity under which two or more individuals operate the Real Estate Investment Trust. In other words, the Umbrella Partnership is a mutually agreed-upon arrangement between a property owner and the REIT that allows the property owner to transfer ownership of an income-producing asset (for our purposes, real estate) to the REIT.

Why Transfer Ownership to an UPREIT?

There are many reasons why an investor might want to transform an income-producing property into shares within an entity like an UPREIT.

In exchange for the transfer of ownership, the UPREIT converts the provided properties into global shares of ownership in the Real Estate Investment Trust. In other words, the property seller is trading their property for shares in the REIT, while the REIT is benefiting by diversifying its portfolio and gaining a valuable income-producing asset.

As an investor, you see returns from this symbiotic relationship as well: your portfolio is sheltered by the collective diversity of your chosen REIT (assuming it isn't asset-specific). Additionally, you gain truly passive income in the form of hands-off management. For any investor who's worn the property management hat for too long, this is an opportunity for relief from a burdensome portfolio.

Let's explore some of the other benefits an UPREIT can offer property investors!

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The Benefits of an UPREIT for Investors

Avoid Brutal Taxation

There are several key benefits to an UPREIT transaction between an investor and their chosen Real Estate Investment Trust. One of the primary benefits includes deferring revenue devouring taxes.
 
When an investor converts the value of their physical assets into shares in the REIT, there's no real cash flow to tax. Under these circumstances, the investor does not recognize an immediate gain—and can therefore defer or avoid outright costly capital gains taxation.


As fellow investors, we see no reason why the portfolio you worked so hard for should be eaten up through taxation on a traditional sale. You still have your retirement to consider!

Develop Diverse and Balanced Portfolios

Another key benefit of an UPREIT is updating, diversifying, and balancing an imbalanced portfolio of investments. Due to a large number of REITs that are currently being publicly traded, it is fairly simple to transfer a single income-producing property into shares in a Real Estate Investment Trust.

In a publicly-traded REIT, these shares behave just like any other stock. The advantage to you in a diversified REIT is that you gain access to a bevy of assets that are dispersed geographically and by class. This means you can take a single unbalanced or unstable property and turn it into shares in a much more stable and balanced UPREIT.

Turn Stagnant Assets Liquid

Owning stock in an UPREIT allows property owners to turn their stagnant assets that might otherwise be difficult to sell for cash into a liquid asset by trading it for shares within the REIT. This means that an illiquid asset can be transferred via the UPREIT into shares that can be tapped for capital as needed with reduced tax loads.

For investors who have been seeking a way to unburden themselves from properties that seemed ideal at the outset, this can be a massive boon!

Is an UPREIT Right for You?

While there are many advantages to an UPREIT transaction on appreciated real estate, as with any financial or business decision, there are potentially risky aspects to acknowledge as well.

What are some reasons why an investor might feel wary of transforming their assets through an UPREIT?

Broken Chain - Freedom And Separation Concept

Indirect Ownership

Once an UPREIT transaction occurs, the original owner of the appreciated real estate loses control over the asset or assets. 

While this could be concerning for some indivi

duals who are used to having full authority over their assets, there are certainly advantages to this aspect of an UPREIT! For example, the former property owner is no longer responsible for the tedious aspects of property ownership—while still reaping the benefits of the asset's value.

You Want to Self-Manage More Properties

If you honestly enjoy answering every midnight maintenance call, then converting your properties to hands-off income-generators might not be ideal for you. If you're just looking for a way to trade one property for another while deferring capital gains taxation, you might prefer the 1031 exchange. This allows investors to keep managing their properties day-in, day-out—and all that implies.

Stock Market Risks—and Rewards

Because the former property owner has sold their property for shares in a Real Estate Investment Trust, they are now beholden to the risks and rewards that are inherent in the stock market system. This can mean that value can be lost as the stock market compresses.

However, the value associated with a once stagnant and fully appreciated property can multiply under expert REIT management. Additionally, your shares still represent a collective of physical assets: unlike fickle intellectual property, the demand for housing will never disappear.

"Step UP" to a New Level of Investing With The Peak Group

An UPREIT transaction has many advantages, and astute investors would be wise to investigate to learn more about this unique tax-deferral partnership!

While we only briefly covered a bit about what makes an UPREIT such an exciting opportunity for investors seeking financial freedom, we'd be happy to be your guide to the next "step UP" for your investment portfolio! As former DIY and fix-flip investors, we know what it's like to "want out" on stagnant assets that no longer hold the appeal they once had.

If you're interested in what an UPREIT can do for your portfolio, get in touch with us! There's no reason to deny yourself the financial freedom you've been looking for.

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Posted by The Peak Group on February 13, 2020