In the past, many real estate investors choose to invest in triple net lease (NNN) properties because they are, for the most part, management-free. While the desire to get out of management is understandable, especially for real estate investors that have worked hard managing their properties for decades and now want to enjoy the fruits of their labors, investing in NNN properties brings a variety of risks that many investors fail to consider.
However, with DST Properties, investors can get out of management and diversify into long-term net lease properties and other asset types to create and own a more balanced portfolio of properties. If you are not familiar with NNN and DST properties, the following section will give you a basic idea of these strategies.
What is a Triple Net Lease?
A triple net (NNN) lease is defined as a lease structure where the tenant is responsible for paying all operating expenses associated with a property. The triple net or NNN lease is considered a “turnkey” investment since the landlord is not responsible for paying any operating expenses.
Many triple net-lease properties are leased to national tenants who guarantee the payment of the rent, under long-term leases. Examples include Walgreens, Dollar General, Fresenius Kidney Care, and O’Reilly Auto. While Triple Net lease comes with several benefits, there are also a ton of risks associated with investing in one.
The biggest risk with a net lease is that if the main tenant default or declare bankruptcy, it can be incredibly difficult to find a new tenant to replace the original tenant. This is one of the major reasons behind the mass exodus of real estate investor to DST.
What is a Delaware Statutory Trust?
Before DSTs were approved by the IRS as qualifying for a 1031 exchange, investors were limited to deeded interest in real property. With a DST, the exchanger invests in beneficial interests in a trust, which in turn owns the real property. A DST may hold a single property or a diversified portfolio. DSTs are available with a minimum investment of $100,000. We would be happy to discuss how this option may be a great fit for your exchange.
Why Investors Are Choosing DST Strategy over NNN lease
Many investors realize that placing a large portion of their net worth into a single NNN property is just not prudent. The DST strategy provides a potential solution to investors wanting NNN leased type of properties and national tenants but with the ability to build a diversified portfolio of them. This is in contrast to “betting the farm” on a single piece of NNN property.
It is important to note that diversification does not guarantee against losses or guarantee profits. Investors should speak with their CPAs and attorneys for guidance as to if a DST investment is suitable for their particular situation prior to considering a 1031 exchange.
- Inflation Protection Potential
The problem with most NNN lease properties is the flat to minuscule rental increases that will potentially cause their values to suffer. For example, Walgreens and Starbucks often have leases with primary terms that are from 20-25 years. During this 20–25-year period, the rent that they pay to the landlord will stay the same for the duration of the lease. Inflation could potentially wreak havoc on a static income stream such as this.
DST strategy grant investors access to asset classes that historically have shorter lease terms than most NNN properties, such as multifamily apartments and self-storage properties. Asset classes with shorter lease terms can potentially be attractive to investors because when the leases are reset, the tenants are theoretically paying a greater amount than the year before, allowing the landlord to pass along any potential inflationary pressures to his or her tenants.
- DST Properties Are “Pre-Packaged” And Ready For 1031 Investment
For an investor in a 1031 exchange time crunch, a DST property that has been pre- packaged can be a potential solution to a very real capital gains tax burden. Investors wanting to purchase a single NNN property within the 45-day identification period of a 1031 exchange are faced with potential risks.
From financing not coming through, issues with third-party reports and sellers not disclosing material items in the property’s lease, such as early termination clauses or co-tenancy clauses, which can change the economics of the previously agreed upon purchase price.
Typically, the properties of a DST have been acquired and the mortgage put in place, before they are offered to investors. This makes it relatively simple for investors to use the 1031 exchange funds to purchase one or more fractional, DST investments.
How Sera Capital Can Help with DST Exchanges
First, we always recommend that any investor talk with a CPA or tax attorney who is knowledgeable about DST Exchanges. Our experts can give you the most up-to-date details regarding each investment strategy and help you find the option that works best for you and your family. If you have questions about 1031 Exchanges and DSTs, or Delaware Statutory Trusts Fees and Commission, schedule your free 30-minute call today.