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 plan to defer capital gains taxes on prior real estate investment endeavors by completing a 1031 exchange, you may want to consider a DST as a potential backup plan. If you identify a DST as one of your potential replacement properties, then in the event that your other properties cannot be acquired within your exchange period, the DST can be used as a backup to ensure your exchange can be completed.
3. Ensure the DST's debt ratio adheres to your debt requirements.
The debt replacement principle requires a 1031 exchange investor to either take out a new mortgage with a value equal to or greater than the amount owed on the relinquished property at the time of sale or replace the previous amount of debt with an additional cash contribution.
As a pass-through entity, DSTs pass the debt to the investors. Therefore, an investor acquires the value of the cash they invest and the value of the debt they receive without having to qualify with the bank to receive the debt. Average DST loan-to-value ratios range between 45% and 60%. Therefore, it is important to note the loan-to-value ratio of any DST you are considering to ensure it will meet your debt requirements.
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.Learn More About DSTs