If you’re considering real estate investing or considering changing your real estate strategy, maybe you’re wondering why there is so much chatter about Delaware Statutory Trusts (DSTs). Well, we would like to take a moment of your time to tell you about 13 benefits of DSTs that keep us talking about DSTs.
If you’re unfamiliar with DSTs completely, you might want to start your research here with our 3-part series describing DSTs in detail. And if you’re familiar with Tenant in Common (TIC) investments and want to know how DSTs differ from TICs, click here to see 9 reasons DSTs reduce TIC drawbacks.
So why do we like DSTs? Here’s why:
1. No management responsibilities for you.
Let the professional, experienced managers do the dirty work. If you’ve owned rental real estate in the past, you know that property management is time-consuming and stressful. While it can be nice to maintain control over your property and make every decision about the operation of your property, there comes a time when enough is enough. When that time comes, we find that it can be a major relief to hand over the management and the decision making responsibilities to a professional team of experienced managers.
2. Invest the amount you want to invest.
Too often in real estate investing, investors over-extend themselves financially to acquire a suitable investment property. With a DST you can invest the amount that is right for you and acquire the percentage of the property you can afford. Note that there are minimum investments in DSTs. These are typically $100,000 for 1031 exchange investors and $25,000 for non-1031 exchange investors.
3. Acquire investment-grade, high-value properties.
It can be argued that multi-million dollar properties have the potential to produce higher income and larger returns for investors. The problem is that most real estate investors cannot afford to invest in these types of properties on their own. DSTs provide a unique opportunity for investors to acquire partial ownership and experience the benefits only found with these types of properties.
4. Opportunities for diversification.
Because you can choose the amount you invest in a DST, you can split your investment among multiple DST properties, giving you an opportunity to diversify your real estate portfolio. In traditional real estate ownership, an investor sells a property for $500,000 and exchanges it for another property of a similar value. With a DST, the investor could instead exchange into five different DSTs for $100,000 each. Each of these properties could be a different property type spread out in different locations. Such a strategy would decrease the overall investment risk with a more diversified portfolio. Find out more about the importance of diversification here.
5. A valuable inheritance to pass on.
If you have intentions of creating a portfolio of income-generating investments that will outlive you and continue to provide for your heirs long after you’re gone, DSTs could be a worthy investment candidate. As with all 1031 exchange-qualified investments, your heirs will receive a step-up in cost basis when they receive your DST assets so they will not have to inherit the previously deferred capital gain liabilities. Furthermore, your heirs receive a hands-off investment, so you don’t have to worry about them not having the skills, knowledge, or time to take over the management of the real estate. And lastly, if you have multiple heirs, a DST offers an option to more easily divide your assets. When all of an investor’s capital is in one property, the heirs are forced to sell that property in order to split its value. In this situation, they cannot benefit from the ongoing income potential of that property. With DSTs, the ownership can be divided and transferred to your heirs equally.
6. Seven deadly sin protection.
The Seven Deadly Sins are a list of regulations imposed on DST trustees by the IRS to protect DST beneficiaries. These regulations ensure that DST funds are distributed properly to beneficiaries and unnecessary risks are not taken with the DSTs assets. Find a complete list of the Seven Deadly Sins here.
7. Regular distributions.
DSTs are permitted to keep a reasonable amount of cash reserves to be prepared in the event the property requires repairs or faces unexpected expenses. However, all earnings and proceeds above the reserve amounts must be distributed to the beneficiaries on a regular basis and within the expected timeframe.
8. Investors do not have deeded title to the property.
The DST is the sole owner of the property. The investors are beneficiaries of the DST. Since the investors do not have deeded title on the property, they do not have any personal liability for the property. Even if there are unexpected problems with the property, beneficiaries cannot lose more capital than what they invested in the DST. Furthermore, because investors do not have deeded title, they do not have to qualify for the property’s mortgage loan. The DST is the only entity liable for the mortgage loan. Investors do not have to provide personal documentation for loan approval and do not have to worry about other personal assets or liabilities affecting the status of the loan.
9. 1031 exchange qualified.
Most real estate investors know that one of the main reasons real estate investing can be so prosperous is because of the ability to engage in a 1031 exchange. However, many of them do not realize that individual ownership is not the only way to qualify for a 1031 exchange. Because DST beneficiaries are considered to have direct interest in the real estate owned by the DST, the DST property can qualify as the beneficiary’s replacement property in a 1031 exchange. DSTs and TICs are the only way an investor can participate in institutional real estate investment and qualify to complete a 1031 exchange. While Real Estate Investment Trusts (REITs) are popular for institutional real estate investors, REITs do not offer the benefit of being 1031 exchange-qualified.
10. No stress over exchange deadlines.
Many 1031 exchange investors find meeting the 45-day Identification Period and the 180-day Exchange Period deadlines difficult. Because an investment in a DST can close very quickly, investors do not have to worry that the acquisition transaction won’t close on time or that they won’t be able to acquire a chosen property because of the competition in the market. Investors who exchange their relinquished property for a DST property often do so even before the Identification Period has ended. This relieves any stress caused by not being able to meet the exchange deadlines but also relieves the investor from many of the high due diligence demands of finding and acquiring a suitable property.
11. 1031 exchange backup plan.
DSTs give 1031 exchange investors an opportunity to ensure they meet their deadlines and complete a qualified exchange. To use a DST as a backup plan, 1031 exchange investors include a DST property among their three candidate properties identified during their Identification Period. If they cannot acquire their first two choices of identified candidate properties in time to meet their deadlines the DST property remains an option that can close very quickly to meet the exchange deadline.
12. Eliminate boot.
1031 exchange investors do not like to have to pay capital gains taxes on boot because their replacement property costs less than the value of their relinquished property. Because DST interests can be acquired for lower amounts than most worthwhile investment properties, the remaining value, or boot, can be used to acquire a percentage of a DST property as a second replacement property in the 1031 exchange.
13. No up-front closing costs or capital calls.
When you purchase a property on your own, you not only have to pay the sales price for the property, but you typically have to pay additional fees to various agents and service providers throughout the process. DST investors pay their investment amounts in exchange for interests in the DST. They are then never asked to contribute additional funds for acquisition, due diligence, or maintenance costs.
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.