When it comes to investing in real estate, there are a lot of vehicles to choose from. Delaware Statutory Trusts (DSTs) have become a popular option for investors in recent years. We thought we would give you a simple list of the things you should do when investing in a DST.
Here we go…. When investing in a DST:
1. Perform thorough due diligence to evaluate the DST offering prior to investing.
Before investing in any program, it is important to read the Private Placement Memorandum (PPM) to know the objectives, identify the sponsor, understand the cash flow expectations, and inspect the fine details to verify that the program meets your investment goals. At 1031 Crowdfunding, our DST specialists are always happy to answer any questions you may have during your due diligence process.
2. Use a DST as a 1031 exchange backup plan.
If you are expecting to defer capital gains taxes on prior real estate investment endeavors by completing a 1031 exchange, we recommend you select a DST property as one of your three identified candidate replacement properties. In the common event that your other two candidate properties cannot be acquired within your exchange period, the DST property can be used as a backup to ensure your exchange can be completed.
3. Ensure the debt ratio adheres to your debt requirements if using the DST property as your replacement property in a 1031 exchange.
If you are attempting to complete a 1031 exchange with your DST investment, you know you need to adhere to the debt replacement principle. As a pass-through entity, DSTs pass the debt to the investors. Therefore, an investor acquires not only the value of the cash they invest but also the value of the debt they receive. With DST debt ratios typically ranging from 45% to 60%, an investor will receive beneficial interests valued at 45-60% more than the cash they invest without having to qualify with the banks to receive the debt. Furthermore, not all DSTs use debt, it is important to make sure candidate DSTs will pass on the correct amount of debt for your situation.
4. Diversify your portfolio with multiple DSTs or a multiple property DST.
DST’s minimum investment amounts can be relatively low, allowing the investor an option to split their investment among multiple DSTs and diversify their real estate portfolio with multiple property types located in different locations. It is also becoming more common for individual DSTs to own a diversified portfolio of properties. A multiple property DST offering is another way to diversify your personal portfolio.
5. Complete a 1031 exchange once the DST has come full cycle.
Having a beneficial interest in a DST that owns real estate assets is considered a "direct interest in real estate" and, thus, qualifies as a tax-deferrable real estate investment. At the completion of a DST investment, beneficial owners can leverage their income for greater future returns by engaging in a 1031 exchange by purchasing beneficial interests in another DST or another eligible real estate investment.
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.