NAVIGATING THE CHALLENGES OF DST INVESTMENTS

Investing in a Delaware Statutory Trust (DST) can offer many benefits, such as potential tax deferrals and access to high-quality real estate. However, like any investment, it comes with its own set of challenges and drawbacks. Let’s dive into some of the key cons of DST investments and explore the mitigants to these challenges.

1. Loss of Control, Particularly Liquidity

When you invest in a DST, you typically have limited control over the management of the properties within the trust. This lack of control can extend to the liquidity of your investment. Unlike more liquid assets, real estate can be challenging to sell quickly, which can be a significant drawback if you need access to your funds in a hurry.

Mitigant: 721 UpREIT for Greater Liquidity

A potential solution to this liquidity issue is the 721 UpREIT structure. This allows DST investors to convert their interest into units in an umbrella partnership real estate investment trust (UPREIT), providing greater liquidity options. This approach can offer more flexibility for those who might need to access their capital sooner than a traditional DST structure would allow.

2. “Stay Rich” Money, Not “Get Rich” Money

DST investments are often considered a way to preserve wealth rather than significantly grow it. Historically, DSTs have provided an annualized average return of about 8.0% over the last 20 years, net of all fees. While this is a respectable return, it may not satisfy investors seeking more aggressive growth.

Mitigant: Ability to Invest in Unique Business Plans

Despite the general perception, there is room for potentially outsized returns by investing in unique business plans within the DST framework. This is where thorough due diligence and expert selection of investments, like those conducted by Zack and myself, can make a significant difference. By identifying and investing in high-potential properties, it is possible to achieve better-than-average returns.

3. More Work for Your CPA

DST investments can complicate tax reporting, particularly if you are involved in a 1031 exchange. The necessary reporting on IRS Form 8824 can be intricate, especially if your investments are diversified across multiple states. This complexity often results in additional work for your CPA, which can increase your tax preparation costs.

Mitigant: Engaging a Well-Versed CPA

To navigate these complexities, it’s crucial to work with a CPA who has extensive experience in real estate and 1031 exchanges. A knowledgeable CPA can streamline the reporting process and help manage the additional state tax returns, which typically cost around $200-$300 per state. We can assist in finding the right CPA to ensure your tax reporting is handled efficiently and correctly.

While DST investments offer several advantages, including tax benefits and access to quality real estate, they are not without their challenges. Loss of control, liquidity issues, moderate returns, and complex tax reporting are significant considerations. However, with strategic mitigants like the 721 UpREIT structure, careful investment selection, and the assistance of a skilled CPA, these challenges can be effectively managed. As always, thorough due diligence and expert guidance are key to maximizing the benefits of any investment.