When it comes to investing in real estate, there are a lot of vehicles to choose from. Delaware Statutory Trusts (DSTs) have become very popular for experienced and inexperienced investors alike. We thought we would give you a simple list of the things you should Do, and the things you Don’t have to do when investing into a DST.
When Investing in a DST, You Should:
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 shares 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.
When investing in a DST, You Don’t Have To:
1. Manage the property.
Investors can hand over the management and the decision making responsibilities to a professional team of experienced managers who have weathered both the best and the worst of property management situations.
2. Take on liability for 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.
3. Qualify for debt on the property.
DST investors do not have to qualify for the property’s mortgage loan. The DST is the only entity liable for the mortgage loan. Therefore, 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.
4. Get stuck with boot, invest the amount that corresponds to your 1031 exchange requirements.
With a DST you can invest exactly what you want to invest. There is no reason to overextend yourself financially or, worse, leave equity un-invested. Whether you are investing all your exchange funds into a DST or investing a leftover amount after acquiring a property that didn’t quite match your exchange value, there is no reason to pay taxes on boot when a DST is an option.
5. Search far and wide for a DST that fits your specific criteria.
1031 Crowdfunding, LLC is an online marketplace where real estate investors can find, view, and purchase a variety of available, turn-key, investment-grade properties. We present investors with 1031 exchange-qualified properties through DSTs to ensure every 1031 exchange investor has the opportunity to complete a successful exchange.
While we could make other suggestions for considerations before investing in a DST and ways to use your DST investments, we want to make sure you are aware of these few things when investing in a DST. Contact an experienced representative at 1031 Crowdfunding for further information about for your investing needs.