Investing in a DST property like any other real estate investment comes with its own risks and benefits. In this article, you will learn more about the advantages and disadvantages of investing in a Delaware Statutory Trust.
Pros of Delaware Statutory Trust (DST)
Investing in a DST allows you to diversify your real estate investment portfolio easily. And since DST there is no set limit on the number of DSTs one can invest in, you can easily spread your investment into different property classes and geographical locations.
More importantly, most DST offerings allows investors to invest a minimum amount which is usually as low as $25,000-$100,000. This makes it easy for you to invest in multiple DSTs instead of putting all your investments in a single property.
- Passive Investment
Owning a typical rental property requires that you deal with the day-to-running of the affairs of the rental. But investing in a DST relieves you of the regular landlord responsibilities—toilet, termite, tenant, trash and telephone. It’s really for people who want out. As we like to say at Sera Capital, when you want out, call us in.
A DST is a passive investment because the sponsor is responsible for identifying the properties, due diligence, raising funding, and sometimes managing the DSTs on behalf of the beneficiaries. All that you need do is to purchase equity in the DST to participate in the distribution of its income and sale proceeds.
- 1031 Exchange Tax Deference
This is one of the significant upsides to investing in a DST is the ability to defer the payment of capital gain taxes. According to the IRS revenue ruling 2004-86, beneficiary ownership in a DST meets the requirements of like-kind property in a 1031 exchange.
What this means is that your ownership interests in a DST investment are eligible for 1031 exchange upon the sale of the DST. You can use your share of the sale proceeds to do a 1031 exchange into another DST or like-kind property thereby deferring the payment of capital gain taxes indefinitely.
- Institutional Grade Assets
Investing or doing a 1031 exchange into a DST allows you to be a beneficiary owner of an institutional-grade real estate that would ordinarily be out of your financial reach. DSTs are institutional-grade properties worth tens of millions like triple-net lease and multi-family apartments. With $100,000 you can 1031 exchange into a professionally managed $100 million property. Please be advised, that DSTs are for accredited investors only.
Cons of a Delaware Statutory Trust (DST)
- Lack of Control
Lack of control is a big one. When you invest in a DST, you have no control over the happenings within the DST. The IRS ruling about DST structures stipulates that investors could not have any control over their specific DSTs both in the aspect of operations and decision making. While sponsors may request monthly or quarterly feedbacks from investors, this shouldn’t be misplaced with control.
As a DST investor, you cannot make any decision even if it regards to painting the DST or when to sell the property. All the decision-making power lies in the hand of the sponsor.
- DST Properties Are Illiquid
This is one of the biggest downsides to investing in a DST. When considering whether to invest in a DST, you should be aware that your equity will remain invested until the DST is sold. Equity invested in a DST is difficult to convert to cash which can give pause for investors looking for a great investment with easy liquidity. If you need liquidity, pay taxes on a portion of the proceeds and then invest the rest.
DSTs are a long-term investment that requires investors’ equities to be held for 5- 10 years before its sale. It is real estate, after all. An investor may be able to sell their beneficial ownership interest in a secondary market but this rarely happens due to the complexity associated with it.
- DSTs Cannot Raise New Capital
Again, as per the IRS ruling of 2004-86, once the initial offering for investments in a DST is closed, the sponsors are unable to make new capital calls or receive contributions from investors. Also, a change in occupancy or rental vacancy can lead to a reduction in the expected monthly rental income of investors and the property cash flow. This is one of the reasons why the IRS expects DSTs to be in great condition upon their purchase. As always, working with a 1031 exchange professional will help you navigate any potential murky waters.
As 1031 Exchange and Delaware Statutory Trust Consultants, it is our goal at Sera Capital to shine a light on the DST industry, especially when it comes to DST Commissions and Fees. If you’d like to set up a complimentary call, schedule a call on our calendar.