At 1031 Crowdfunding we are always seeking to answer some of the questions we get asked most frequently. Whether you are looking to begin investing in real estate or you are an experienced real estate investor looking for an alternative investment vehicle, you may be curious about the potential of Delaware Statutory Trusts (DSTs).
How do I break even? I’m looking to invest $100,000 in real estate. I want to increase the value of my principal, but I understand there is no guarantee by any investment that my principal will increase. I will complete the due diligence to ensure the investment can reasonably meet the production expectations and my goals, but what if the actual production falls short of the expectations? I want to earn money, but, if I can’t do that, I certainly do not want to lose money.
To truly break even, two things must happen. One, you must receive back the total amount of capital you used to purchase the asset. Two, you must receive back an amount equal to all principal payments made to pay down the debt on your investment.
For example, let’s say you invest your $100,000 in a DST with a 60% loan-to-value ratio, acquiring $150,000 in debt for a total $250,000 worth of beneficial interest in a $10 million offering. Over 5 years, 20% of your debt is paid down, lowering your debt total by $30,000. Some investors would be satisfied if the property sold for $8.8 million, enough to pay the remaining 80% of the $6 million loan and return the original $100,000 invested. In this case, what would be overlooked is the loss of the additional $30,000 equity that had been re-invested on their behalf through the debt payments. To fully break even, you would want to verify the property can sell at a high enough value that both the principal investment and all principal debt payments are returned. (Of course, you should also consider acquisition and selling costs when determining total gains and losses.)
If you want to ensure you can at least break even, you’ll want to determine if the property can either maintain a necessary minimum sale value or appreciate to that minimum sale value. For an indicator of how time will affect a property’s value, consider its asset class.
Multi-tenant assets such as multifamily or multi-tenant industrial have a potential for rapid growth of net operating income (NOI) as the short-term lease agreements established at these properties support regular, aggressive rental-rate increases. With increasing rental income, a property’s sale value increases. However, these types of leases are susceptible to the impact of a negative shift in the economy, thereby reducing the potential sale value during an economic downturn.
In contrast, commercial properties with single tenants under triple net leases (NNN) experience slower rates of NOI increases because their long-term lease agreements may only have one or two rental rate increases scheduled. While these types of properties tend to hold their value because of their stable tenants and long-term lease agreements, they have a lower potential for significant appreciation.
Knowing the market and planning accordingly are important regardless of the asset type in which you invest. Whether you will break even depends on proper management and achieving operational expectations. Each DST program will operate under different circumstances. It is important to evaluate each program individually to determine if its circumstances will suit your goals and needs.
While the information provided above has been researched and is thought to be reasonable and accurate, it’s important to understand that all investments, including real estate, are speculative in nature and involve substantial risk of loss. Additionally, private placements of securities are not publicly traded, are subject to holding period requirements, and are intended only for accredited investors who do not require a liquid investment.