Asset Selection: Which Properties to Convert vs. Retain
Real estate investors often face a critical decision when managing their portfolios—should they convert properties into a Real Estate Investment Trust (REIT) or retain them for personal or direct investment? Making the right choice can significantly impact long-term portfolio performance, liquidity, and tax efficiency. This guide will walk you through key considerations, benefits, and criteria to help you decide which assets to convert and which to hold onto.
The Importance of Being Selective with Assets
Not all properties are created equal, nor do they serve the same strategic purposes within a portfolio. When evaluating your assets, it’s crucial to:
Align investment goals – Consider whether you prioritize liquidity, passive income, tax advantages, or active management opportunities.
Maximize portfolio efficiency – Focus on how individual properties fit into your broader financial and estate planning goals.
Understand market conditions – Evaluate whether market trends support selling, converting, or retaining specific types of properties.
By being selective, you can strategically position your portfolio for both short-term performance and long-term growth.
Benefits of Converting Properties to a REIT
Converting properties into shares in a REIT presents numerous advantages, especially for those seeking passive income, tax deferral, and diversification. Here’s an overview of the primary benefits:
1. Maximize Tax Deferral Benefits
Converting assets via a 1031 exchange into a publicly traded REIT or Delaware Statutory Trust (DST) allows you to defer capital gains taxes. This tax efficiency can preserve more of your equity, giving you the opportunity to reinvest and grow your wealth.
2. Portfolio Stability and Passive Income
REITs offer consistent dividend payouts from diversified real estate assets, making them an excellent choice for investors seeking steady, passive income. These payouts typically come from rental income or strategically sold assets within the trust.
3. Liquidity and Flexibility
Unlike traditional real estate investments, shares in publicly traded REITs are highly liquid. You can buy or sell shares as needed, granting you the flexibility to respond to changing financial needs or market conditions.
4. Compound Returns Through Reinvestment
By converting your properties to shares in a REIT, you can benefit from the compounding effect of reinvested dividends. Over time, this approach can significantly enhance portfolio value.
Criteria for Properties to Convert
Not every property is a prime candidate for conversion. Below are the key characteristics to evaluate:
1. Credit-Worthy Tenants with Long-Term Leases
Properties leased to reliable, credit-worthy tenants provide stable, predictable income streams. These assets align with the risk-averse nature of a REIT portfolio and are more likely to meet institutional standards.
2. Properties Meeting REIT Tenant Credit Standards
REITs typically focus on assets that promise low risk in terms of tenant payments. Properties with a strong history of full occupancy and dependable rental arrangements are ideal candidates.
3. Highly Appreciated Properties with Deferred Gains
If you own highly appreciated properties with significant deferred gains, converting them can unlock tax benefits. By deferring taxes via a 1031 exchange, you can transition equity into a REIT while maintaining your investment capital.
4. Minimal Management Requirements
REITs favor properties that don’t need extensive ongoing management. Stabilized assets like retail centers, industrial warehouses, or medical offices often fit this criterion.
Reasons to Retain Certain Properties
While converting properties into a REIT offers many benefits, there are circumstances where retaining an asset makes more sense. Here are a few scenarios to consider:
1. Short-Term Value-Add Projects
Properties undergoing renovations, repositioning, or other value-add activities may be better kept in your portfolio. The potential for short-term appreciation or flipping offers attractive returns outside the scope of a REIT structure.
2. Flexibility for Future Personal Investments
If you need direct access to assets for personal or business uses, retaining ownership keeps your options open. For example, you might want to use a property to secure financing for future investments.
3. Geographic or Strategic Importance
Certain properties hold value beyond their financial returns. For instance, assets in prime locations or with sentimental significance may warrant keeping for specific personal, family, or strategic reasons.
Making the Decision
Choosing whether to convert or retain an asset requires a comprehensive evaluation of your portfolio and personal goals. To guide your decision-making:
Consult With Experts – Work with financial advisors, tax professionals, or REIT specialists to assess your options and maximize advantages.
Assess Both Financial and Personal Goals – Balance your financial objectives with personal preferences, estate planning needs, and investment timeline.
Prioritize Portfolio Diversification – Consider how converting or retaining assets affects the overall diversification and risk profile of your portfolio.
Key Takeaways
Converting properties into REIT shares provides tax advantages, passive income, and liquidity, making it an ideal option for many real estate investors.
Properties with stable income streams, long leases, and significant deferred gains are prime candidates for conversion.
Certain assets, such as value-add projects or those serving personal needs, may be better retained for flexibility or strategic reasons.
By carefully evaluating your properties against these criteria, you can make informed decisions that align with your financial goals while optimizing your portfolio’s performance.
