DST Investments In Inflationary Times
Carl E. Sera, CMT
June 16, 2023
The Impact of the Inflation Environment on DST Investments: How DSTs Can Help You Protect Your Real Estate Portfolio.
For the past year, consumers have felt the financial strain of rapidly rising prices on a wide range of products. Whether you're shopping for groceries, buying a big-ticket item, or simply filling up your gas tank, it's challenging to overlook the impact of our high-inflation climate on your purchasing power. To make matters worse, this is all happening in the scope of rising interest rates, where higher interest rates make borrowing more dilutive than it has been in recent memory.
In February 2022, the annual inflation rate in the United States reached 7.9%, the highest since January 1982. The Consumer Price Index (CPI) increased the most in 40 years. While the Federal Reserve originally predicted that inflation would reduce by the end of 2022, it now appears that the current high and persistent inflation will continue for some time.
If you’re a real estate investor, you may wonder how this rising price environment will impact your current holdings and whether you should adjust your portfolio. Here are a few ways investing in a Delaware Statutory Trust (DST) can help you protect your investment and maximize returns even amid the rising inflation rate.
What is a Delaware Statutory Trust?
A DST allows accredited investors to buy fractional ownership in commercial real estate projects. The assets inside the DST—multifamily residences, self-storage facilities, industrial facilities, and more—are professionally managed by a sponsor, absolving the investor of any direct property management duty. Furthermore, DSTs can provide investors access to real estate in various industries and geographic regions, which can help diversify portfolios, minimize risk, and reduce volatility.
How Can Inflation Be a Headwind For Investors?
Inflation can be damaging to investors’ capital because they need to achieve returns that are higher than the rate of inflation. Below is an example:
Suppose inflation is running at a rate of 3% annually, and an investor keeps her capital in a money market account that pays a fixed interest rate of 2% annually. In that case, she is losing 1% of her purchasing power each year -- relative to inflation. Over the long term, the investor’s capital can purchase less because the cost of goods and services has risen faster than her investment returns.
To avoid a situation like this, investors should consider seeking out inflation hedges or asset classes like DST investments that are uniquely positioned with the potential to perform well in periods of high inflation.
How DSTs Can Help You Protect Your Portfolio Against Inflation
If your bottom line is to seek wealth preservation during an inflationary economic period, investing in a Delaware Statutory Trust, or DST, is potentially a desirable real estate investment option.
DST 1031 properties may help investors reduce the adverse effects of inflation. For example, many DST investments have access to properties that have historically shorter lease terms that allow the investor to pass along any inflationary pressures to their tenants.
By doing a 1031 Exchange into a DST, you can likely maximize the current height of the real estate market and diversify your funds into multiple DSTs that are geographically varied and in distinct asset classes (think REITs), helping to mitigate and possibly minimize the overall risk to your capital.
While real estate still has its risks, you may be happy to know real estate is an inflation-hedging strategy. Real estate investors likely have seen property value increase over the last several years and may wonder if this would be an excellent time to sell.
Many other investment property owners may be weighing that same decision. One compelling strategy for potential sellers to maximize gains today yet not get clobbered with capital gains tax is to consider doing a 1031 exchange into a DST.