As an investor, you may be aware of the importance of real estate as a balancing element to your portfolio’s riskier additions. If you’re considering adding to your holdings with tangible real estate assets and haven’t yet, consider the following before you leap:

• Previous estimates for just how much of your portfolio should be anchored by real estate assets were around 10 to 30%. That number has now climbed from 30% to 50%—and that was before COVID-19 took the stock market for a ride.
• Commercial real estate assets—particularly office and retail spaces—were hit hard due to the pandemic, even to the point that major industry names like Staples, H&M, and Starbucks refused to pay their rent or asked for reductions.
• Despite broad job cuts and furloughs, residential rental payments remained relatively stable across the direst months of the pandemic, reinforcing the security of the residential real estate sector compared to retail assets.

What we’re trying to get at with the above statistics is that the type of real estate you choose to diversify with now matters more than ever before. Suppose you own a portfolio of risky assets that need stabilization. In that case, the last thing you want to do as an investor is try to provide this stability with a form of real estate that might be struggling as much as your more volatile stocks.

For this reason, we recommend that investors looking to diversify their current holdings to reduce risks consider investing in residential real estate as their primary vehicle for security. However, the best way to do this is through UPREIT investing.

Not Every Form of Residential Real Estate Is Worthwhile

If diversity is your goal, it’s a great expenditure of your time to ‘vet’ certain forms of residential real estate investing. This should always be done before you dive into any approach to see if they can meet your needs on this front without requiring a massive time sink.

• Research your available options thoroughly based on your access to the capital you would need to invest in any given opportunity.
• Investigate the amount of hands-on time this type of real estate approach would require to diversify your current holdings and investments relative to their earning potential.
• Consider the impact this type of real estate investing methodology might have on your financial future, lifestyle goals, and long-term estate planning strategies.
• Check into what kind of tax implications your chosen approach may have, and how that will directly impact your retirement and income plans, and any gifting you intend to do.

All of the above are valid reasons for why traditional investing often falls short of the benefits of UPREIT investing for investors looking to diversify.

How an UPREIT Works for You

Purchasing a turnkey property or personally managing your buy-and-hold ventures can certainly set you up for long-term income and diversify your riskier investments. However, this approach still runs afoul of capital gains tax on a property when it finally comes time for a sale. The reality for many investors in traditional real estate is that you reach a time when you no longer want to manage your investments, or your beneficiaries find it too challenging to take on the role. This means you have to find ways to defer capital gains tax without somehow just exchanging one problem for another. 

• Deferring capital gains on home sales is just one reason why many investors are drawn towards an UPREIT structure beyond the enhanced diversification they offer.
• Not only do you gain access to a broad portfolio across a diverse market more readily than you would as a lone investor, but these properties are managed for you professionally.
• You essentially get all of the benefits of turnkey investing without any of the hassle of owning a property outright—and without ever having to buy any property at all.

When you purchase operating units in an UPREIT structure, you bypass the need to obtain any properties directly while still enjoying the diversity and income of a varied and curated portfolio. If you already have a portfolio of properties, you can easily convert them into high-performing operating units while deferring capital gains tax on property. This allows you to actually tap into the value of your properties and operating units as much or as little as you need, saving you considerably from penalizing taxation.

Of course, these are just a few of the reasons why we prefer UPREIT home investing over traditional residential real estate—and why UPREIT investing is the gift that keeps on giving!

Choose the Right Partnership

Just as you should evaluate the potential of any real estate investing strategy you’re considering when it comes to how it will benefit the diversity of your portfolio, you need to vet your potential UPREIT partner as well.

At The Peak Group, we’re happy to guide investors towards this next stage of your portfolio development—and towards diversified and secure wealth! Learn more about the benefits of converting your portfolio with our free guide, Let Freedom Ring! Then, reach out to the investing experts here at The Peak Group to learn more about the kind of returns you can expect to see from a well-managed UPREIT!

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