Why Consider Investing in a DST?
The Potential Benefits of DST Investments
Investing in a Delaware Statutory Trust (DST) offers numerous benefits that make it an attractive option for savvy investors. DSTs provide access to high-quality commercial properties, potential for steady passive income, and significant tax advantages through 1031 exchanges.
With professional management handling the day-to-day operations, investors can enjoy the financial rewards without the hassle of property management. Discover why DSTs are increasingly becoming a preferred choice for those seeking to enhance their investment portfolio and achieve long-term financial goals.
Free At Last!
Real estate investors often find themselves worn out by the relentless demands of managing their own properties—dealing with tenants, handling maintenance issues, paying bills, and overseeing property managers. The constant need to juggle these responsibilities can be both draining and time-consuming, leaving little room for investors to focus on other priorities.
Delaware Statutory Trusts (DSTs) offer a solution by providing a much-needed break from these burdens. With a DST, all operational aspects are managed by professional sponsors—often with billions in real estate assets under management and decades of experience. This hands-off approach allows you to step back from the day-to-day stresses of property management. You can enjoy the passive income and potential appreciation from your investments without the ongoing hassle, giving you the freedom to focus on what truly matters to you.
Potentially Greater Returns
Over the past 20 years, approximately 250 DSTs have gone “Full Cycle.” This means the sponsor purchased the asset, raised equity, managed the property, and eventually sold the asset. On average, these investments have delivered an annualized pre-tax return of about 8%. However, returns can vary widely depending on factors such as the sponsor or manager’s expertise and the risk profile of the tenants.
Additionally, the tax benefits associated with DSTs can be substantial. Because DSTs are 1031 exchange eligible, capital gains are deferred at the outset. Monthly distributions are often highly tax-sheltered, and when the property is sold, capital gains can typically be deferred again through another 1031 exchange or a 721 exchange. Many investors continue to defer gains until they achieve a basis step-up, at which point all accumulated gains—and the associated capital gains taxes—effectively disappear.
Legacy Planning
For over a century, the 1031 exchange has been a powerful tool for transferring real estate wealth to future generations. However, the process can often be fraught with challenges. Parents face the difficult task of selecting which heir—often adult children—will manage the assets and how to fairly allocate the accumulated real estate wealth, which isn’t always easy to divide. Even if heirs start out on good terms, these tough decisions can lead to family disputes.
DSTs eliminate many of these potential family conflicts. With a DST, there’s no need for a management handoff since the sponsor already handles property management, and DST interests are easy to divide among heirs. This allows each heir to make their own decisions without causing friction within the family.
Liquidity Options
Real estate investments are not liquid like a stock—it typically takes several months to prepare and sell a property. Similarly, DSTs are not liquid either. As a DST investor, you must wait for the sponsor to sell the property, which generally takes a minimum of two years from the initial investment, and often closer to five to seven years.
However, many DST business plans are designed to address this liquidity challenge. These plans often include a strategy to transition into an Umbrella Partnership REIT (UpREIT) via a fully tax-deferred 721 exchange. Within this structure, investors gain liquidity options alongside their distributions and potential appreciation. This strategy allow investors to strategically time their exit, such as during lower tax bracket retirement years, after a basis step-up, or to pay estate taxes, thereby facilitating tax mitigation and efficiency.
Asset Protection
Many real estate investors hold properties personally or in a Living Trust, neither of which offers asset protection. This lack of protection means that if a legal claim is made against a property, all of the investor’s assets could be at risk. The combination of minimal protection and limited diversification can jeopardize their financial future.
A DST provides a solution by isolating assets and enhancing diversification, ensuring that issues with one property don’t affect others. Additionally, a DST typically shields your beneficial interest from personal lawsuits, while still allowing you to retain the estate planning benefits of a Living Trust. With investment minimums starting at $25,000, DSTs efficiently diversify your real estate portfolio while minimizing risk, administrative burden, and costs.
GO INSTITUTIONAL
Investing in a typical 1031 exchange property often involves challenges like older buildings needing costly maintenance, weak and non-diversified tenants (often just one), and less experienced property managers. These issues can lead to more headaches, inconsistent cash flows, and poorer overall returns.
In contrast, DSTs offer access to institutional-grade real estate managed by seasoned sponsors, featuring high-quality assets like Amazon Distribution centers and large apartment complexes. This provides more stability, better management, and stronger tenants. Over the last five years, DSTs have raised over $20 billion in 1031 exchange equity, highlighting their growing appeal.
Mitigate 1031 Closing Risks
The 1031 45-day clock moves quickly, making it challenging to find a suitable investment property within the tight timeframe. Investors often feel pressured to rush into contracts, quickly analyze financials, complete inspections, and secure financing, often leading to hasty decisions and potentially compromised investments.
To mitigate these risks, a strategic approach is to invest in pre-purchased DST properties. These properties have already been thoroughly vetted, with all necessary reports—such as appraisals, inspections, and financial forecasts—completed in advance. This readiness allows investors to close transactions within about a week, significantly reducing stress and ensuring a more thoughtful, strategic investment process. By choosing DSTs, investors can avoid the rush and make decisions with greater confidence, optimizing their outcomes.
Easy 1031 Debt Replacment
One of the main challenges in a 1031 exchange is the requirement to purchase property of equal or greater value. This rule necessitates having additional cash available or securing new debt if a loan payoff is involved. In today’s high-interest market, obtaining financing can be difficult.
DSTs offer a streamlined solution with pre-arranged, non-recourse financing, eliminating the need for investors to secure debt independently. This simplifies the process, meeting debt requirements without personal liability. Some investors even use DSTs solely to replace debt, freeing up cash to purchase traditional real estate investments all cash.
1031 ID Strategies
The timelines in a 1031 exchange can be incredibly tight, with the 45-day deadline for identifying replacement properties arriving quickly. Even if you’re under contract on one property, the challenge remains: what backups do you pick? Traditional investments can be taken off the market by another buyer or the owner, intensifying the pressure to find suitable replacements.
DSTs offer more predictable availability compared to traditional properties, typically remaining open for investment over several months. This predictability, combined with strategies like using the “mop up” approach to fill any shortfall in value or opting for DSTs with shorter hold times (2-5 years), provides flexibility to meet IRS requirements and revisit the market when conditions improve.
By incorporating these strategies, investors can navigate the 1031 exchange process with greater confidence and success.
