Comparing DSTs with Other Passive Real Estate Investments
Carl E. Sera, CMT
May 25, 2023
Passive Real Estate Investments in the United States
DSTs Compared With Other Passive Real Estate Investments
As we age, most of us want to spend time with family and friends, making memories together. With this in mind, it makes sense that retirees no longer wish to manage their real estate portfolios actively. Luckily, with Sera Capital on your side, there are plenty of ways to make the most of your property without being too hands-on. Our team serves clients across the United States, helping them compare the benefits of numerous passive real estate investment options. Learn more about how DST investments stack up against other capital management strategies.
An Overview of DST Investments
A Delaware statutory trust (DST) offers a way for passive investors to obtain fractional ownership of high quality, professionally managed property. In brief, several investors can combine their funds, along with a sponsor, to invest in a DST. The DST becomes a legal entity that comes with limited liability and meets the requirements for a 1031 exchange. Because the investor doesn't have direct ownership, they aren't required to engage in active management duties, such as hiring employees or contracting maintenance workers. Yet, they earn the tax benefits of investing in real estate. Here are the two primary ways to invest in a DST:
• Direct Cash Investment: If you're interested in a DST, you can participate by simply investing cash directly into the trust. We seldom see this done, however.
• 1031 Exchange: Many individuals working on estate planning choose a 1031 exchange with a DST. This process allows an investor to retain ownership but take on a passive role in management and diversify their real estate portfolio. The #1 reason why people do this is for tax deferral purposes. 1031 Exchanges exist to defer capital gains tax.
How Investors Benefit from DSTs
DSTs are an excellent way to make passive monthly income, but investors choose this option for other reasons. Savvy investors take full advantage of their DSTs and enjoy the following benefits, among others:
• Reduce risk associated with investing in just one property time
• Increase income potential
• Ability to upgrade to better property types
• Create generational wealth
• Better liquidity
• No in-depth knowledge is required
• Save time on business and spend time with family
• Have fun investing in a variety of properties
How Delaware Statutory Trusts Stack Up
As you narrow down your options for passive real estate investments, it's essential to understand how DSTs stack up against similar possibilities. However, many of these wealth management strategies are complex and require the help of a professional to ensure proper procedures. But never fear—Sera Capital is here to help you reach your financial goals using DSTs or several other methods. Here's how Delaware Statutory Trusts compare with other passive investments:
Real estate investment trusts (REITs) are companies that act as trusts, investing in a variety of real estate properties and paying out dividends to shareholders. Investors get fractional ownership, just like in a DST, but REITs and DSTs aren't interchangeable. Unlike REITs, DSTs are only available to accredited investors that meet income and net worth requirements. Moreover, REITs can be publicly traded; anyone meeting the requirements and with a brokerage account can buy and sell. Here are some more differences between REITs and DSTs:
- Objectives: Investors with short-term financial goals may benefit most from a REIT. These investments can generate significant income in just the first week. In contrast, DSTs are more of a long-term investment for those hoping to spread out their profits.
- Involvement: These passive investment options require very little investor involvement. Nevertheless, we encourage investors to stay updated on management decisions.
- Costs: REITs come with a much lower transaction cost. You may only need to pay a small commission fee and other minor charges. DSTs often come in much higher, with origination, disposition, and annual management charges. However, by purchasing DSTs through a Registered Investment Advisor like Sera Capital, you can reduce these costs greatly.
- Minimum Investments: To invest in a REIT, an investor must purchase at least one share. Depending on the REIT, this may be less than $100. On the other hand, DSTs often require a minimum of $25,000 per transaction.
- Time Commitment: There is no hard and fast time commitment with REITs. Depending on the investor's needs, they can be held for a long or short time. However, investing in a DST usually requires a five-to-ten-year commitment where the investor doesn't have access to their capital.
- Tax Benefits: Both REITs and DSTs come with certain tax benefits. REITs are taxed at the investor level and aren't double-taxed, which minimizes the overall tax burden. DSTs allow investors to defer taxes on the sale of a property, which in theory, can continue indefinitely.
- Liquidity: Because publicly-traded REITs behave like stocks, they're liquid all day during trading hours. With DSTs, liquidity is limited to when the DST sponsor sells the property.
Crowdfunding is everywhere nowadays—people crowdfund everything from events to art projects. When done correctly, this investment technique can create passive income from real estate properties. Investors who engage in crowdfunding purchase a property with the help of other investors, and many times, people can pool funds to invest in mortgage loans anywhere in the United States.
Investors with remote ownership have a little more control over their properties while still earning passive income. This strategy allows investors to own their property and hire an on-site property manager to oversee day-to-day activities. The investor typically has closer watch over the manager and can directly influence how a property is run. Remote ownership can work in several different ways, including:
• Investor visits the property often to check on management
• Investor takes a hands-off approach and allows management to make most decisions
• Investor lives out of state and oversees property virtually
Real Estate Funds
Real estate funds are mutual funds that invest in public real estate securities. These are long-term investments and tend to be diverse. Whereas some REITs may only invest in commercial properties, real estate funds usually include a mix of residential, commercial, special use, and more. These funds provide passive income through appreciation, not dividends.
Which Investment Type Is Best?
Every investor is different, and everyone will need an individualized approach to investing in passive income sources. While DSTs may be best for someone doing estate planning and writing their legacy, REITs may do the trick for an investor who wants to generate income rather quickly. Talking to a professional about the best way to manage your unique situation is essential. Sera Capital offers many wealth management solutions to help our clients make the most of their investments. We offer advising for all of the following in addition to DSTs:
- Exit Planning
- 721 Exchanges - where you can 1031 exchange into a DST -that is later purchased by a REIT.
- Opportunity Zone Funds
- Deferred Sales Trusts
- Wealth management
Talk to Our Registered Investment Advisors Today
Selecting the right passive investment approach can be daunting. Many solutions have lots of guidelines, and it can be challenging to sort through them all. Fortunately, Sera Capital is on your side. Our investment advisors will walk you through your options and help you decide on the approach that makes the most sense for you. Get started today.