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?
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.
What Does It Mean to Break Even?
When you sell an investment property, to “break even” means to make back the same amount of money you spent on the property at the time of purchase and the principal payments you made to pay down the debt.
As an investor, you strive to earn profit. Breaking even is a best-case scenario for a property that shows few signs of making a profit. During the ownership of these underperforming assets, investors actively monitor market behaviors to sell properties at break-even prices.
Breaking Even on Real Estate Investment
While the total capital used to purchase a property is essential, many investors neglect to factor in the principal payments made to reduce the debt on a property. For example, you invest your $100,000 in a DST with a 60% loan-to-value ratio. You acquire $150,000 in debt, so you can contribute $250,000 of beneficial interest in a $10 million offer. Other investors pay the remaining $3.75 million, and the DST overall takes on $6 million in debt.
Over the next five years, the DST pays down 20% of its debt for a remaining $4.8 million in debt. This payment includes $30,000 of the debt you took on when investing in the DST. Some investors may feel satisfied when selling this property for $8.8 million. This amount would cover the remaining $4.8 million in debt, the $3.75 million covered by the other investors and your initial contribution.
However, the DST’s 20% contribution to the debt means you will not receive a complete return on the debt you acquired when investing in the DST. In order to break even, the property needs to sell at an amount that returns your initial $100,000 investment and the $30,000 paid to your debt. You should also factor in acquisition and selling costs when calculating the total gains and losses on the sold property.
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. This minimum sale value for real estate will depend on expected debt payments and initial investments. 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.
Bottom line: 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.
Explore DST Investment Break Even Opportunities With 1031 Crowdfunding
Researching available properties is a way to identify purchases that can help you break even at a minimum. When you create an investor account at 1031 Crowdfunding, you gain access to our selection of DST properties for 1031 exchanges.
Our expert team can guide you through the process to help you abide by 1031 exchange terms for your fractional ownership in a DST. With our process, you can complete identification and closing within a week.
Create an investor account today to browse available DST properties on 1031 Crowdfunding.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.