DST Essentials Podcast: Building a Crisis Resistant Real Estate Investment Portfolio

Listen to the DST Essentials with Kay Properties along with Betty Friant, Executive Vice President & Managing Director and Matthew McFarland, Senior Vice President for a podcast diving into a few tips on building a crisis resistant real estate investment portfolio.

We will be discussing:
  • The Importance of Diversification
  • Asset Class Rejection
  • Various Real Estate Access Points
  • The Significance of Avoiding Leverage if Possible

Victor Coronado:

Hi everyone, this is Victor Coronado, senior Associate here at K Properties and Investments. Thank you for joining us on the K Properties 1031 Exchange DST conference call. We will begin with risks and disclosures. DST 1031 properties are only available to accredited investors, generally described as having a net worth of over $1,000,000, exclusive of primary residents and accredited entities only generally described as an entity owned entirely by accredited individuals and or an entity with gross assets of greater than 5,000,000. If you are unsure if you're an accredited investor and or an accredited entity, please verify with your CPA and attorney. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase securities, DSC properties and or real estate. Such offers are only made through a private placement memorandum, PPM, which is solely available to accredited investors and accredited entities.

Securities are offered through finance member FINRA and Civic. FINRA and K properties are separate entities. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice and guidance regarding your particular situation. There are risks associated with investing in real estate and Delaware statutory trust properties, including but not limited to, loss of entire investment principle, declining market values, tenant vacancies, and the liquidity. Investors should read the PPM carefully before investing, paying special attention to the risk section. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. Please speak with your CPA and attorney to determine if an investment in real estate/DST properties is suitable for your particular situation or circumstance. Past performance is not indicative of future returns, potential cash flow returns appreciation are not guaranteed and could be lower than anticipated.

Thank you everyone for tuning in and now would like to turn the call over to Matt McFarland, senior Vice President with K Properties and Investments.

Matt McFarland :

Thank you very much, Victor, for the introduction and thank you to all of our listeners. As always, we really appreciate you carving out a few minutes of your Friday to tune in to DST Essentials. Many of you have been listening for many months, gone back. This is a series that we've posted that's really designed to be another educational platform for our current clients and prospective clients alike to continue to learn more about the DST and 1031 exchange investment process. In this series, we have interviewed many members of the Kay Properties team who have each brought their own unique and valuable perspectives as we focused on recurring themes and nuances in this DST investment process. So I'm really excited to continue the call today or the series today rather. Before I introduce our guests, I just want to give a little bit of information about Kay properties.

Kay Properties is a national DST, Delaware Statutory Trust investment firm. Our platform, https://www.kpi1031.com/, provides access to the marketplace with DSTs. This includes DSTs from over 25 different DST sponsored companies, custom DSTs only available to Kay clients, as well as on occasion active DST secondary market listings. The Kay Properties team members collectively have over 400 years worth of real estate experience. Our license in all 50 states and have participated in excess of $30,000,000,000 worth of DST 1031 investments today.

I'm very, very excited to have Betty Friant on the call with me. Betty is a managing director that heads up our Washington DC office. Betty comes from an extensive over 35 year background in commercial real estate with an expertise in investment sales. She has extensive market knowledge and holds the coveted CCIM designation, which recognizes expertise in commercial and investment real estate. Betty is really driven by unique passion for identifying clients' needs and helping them identify the best opportunities for their specific situation.

And on a personal level, I have just learned so much from Betty over the years that I've been with Kay Properties, so I'm very, very grateful for her and for any of you that may have worked with her, you'll know what I mean by this.

So today we're going to be talking through a few tips to build a crisis resistant real estate investment portfolio . We found this topic to be relevant just with all the headlines and all the news that's out there with respect to the changing landscape as it relates to just investments in general. And so what I'm going to attempt to do here to make this flow as easily as it can and seamlessly as it can is I'm going to introduce the tips as we go along and then I'm going to call on Betty to kind of expand off some of these tips. So without further ado, Betty, welcome to the call and thanks for being with us.

Betty Friant :

Thank you very much and thank you for all those kind words. You're just so sweet. But I'm looking to forward to this call as well because there's no guarantee that you can have a crisis proof or crisis resistant portfolio no matter what you're investing in, but those tips that you came up with are really, really powerful. So I'm looking forward to breaking them down a little bit.

Matt McFarland :

Absolutely, as am I. And I know we have a lot of ground that we're attempting to cover here, so we're going to do our best. So let's go ahead and jump in with the first tip or concept that I want to have you expand on a little bit. This is a concept that a lot of people are familiar with, diversification. So the question, Betty, is what do we mean by this and why is this important in the context of building a crisis resistant real estate investment portfolio?

07:02 – The Importance of Diversification When Building a Crisis Resistant Real Estate Investment Portfolio

Betty Friant :

Right. Yeah, that is good. Because when we're talking about investment portfolios, people hopefully are diversified across a lot of different categories anyway, not having all their money in real estate, perhaps not having all their money in other markets that you don't have any control over, but to really look at a holistic way to think about investing so that you do have monies in different areas, all hopefully giving you income from different directions each month. And so in real estate, which is our expertise, what we want people to consider is the fact that you don't want all your real estate in one geographic location. You don't want it all in any particular asset class or asset type. You don't want it in just one tenant. You might really like the distribution centers like Amazon or FedEx distribution centers, but you don't want all FedEx. Something could go wrong with FedEx.

None of us think that might happen, but you just never know. So by not having over concentration in any particular area, you really do keep your eggs spread out. And so in case something were to go upside down in any particular industry, you wouldn't be caught so exposed during the recession. It was kind of interesting because student housing really did well during that time. A lot of students couldn't get work. That recession where there weren't many jobs available. And so if you couldn't find work, the best thing to do was go back and get another degree. So student housing did really well, but the exact opposite happened during the COVID-19 pandemic because the schools closed and people found out that they didn't have to, well, some of them didn't pay their student housing lease. And so in many cases it was a very challenged asset class.

If you had all of your money in student housing during the Covid crisis or all of your money in downtown New York office buildings, you could really be looking at a situation that might be challenging, especially if you had a loan on those properties and you were having to make the mortgage payment when you didn't have any tenants.

Same thing had happened with regular real estate. I know back in the day when I was selling commercial real estate, regular real estate, I had clients who had all of their money on the west coast of Florida in a condo hotel or condominium hotel, and they got that red tide, which meant that there's just going to be nobody wanting to rent there for a while. And it was very much of a challenge for them to withstand that. So anyway, think in terms of diversification to try to resist crisis proof your portfolio and look at different geography, different asset class, different tenants, and even different sponsored companies if you're going to be looking at DSTs that we'll get into in a little bit. But different companies are the syndicators for properties where you can buy a piece instead of the whole property. And so that's another way to diversify. Do you want to add to that a little bit?

Matt McFarland :

No, I mean I think that was really great and those examples were really powerful. I couldn't agree more with that as you kind of walked us through the student housing as an example, which we're actually going to get to as this next point. But one thing I want to mention is diversification typically is a concept we're all familiar with as it relates to stocks, especially due to all the platforms that exist where you could very easily. Buy mutual funds ETFs and have your investment automatically diversified across the SMP 500 or all these other different indexes. That concept is not as familiar as it relates to real estate. Why? Because we're dealing with larger sums, especially if this is real estate that we own on our own right in our local market, it's much more difficult to access the level of diversification that we're able to access in the stock market or on these different platforms. The aspect of diversification, I believe it is unique when we're talking about investing in DSTs, which we're going to get to in a couple of points here, but I think that's so powerful.

I know we talk about this all the time, but really this is a benefit specifically to DSTs, but also just in general as we're trying to build a crisis resistant real estate investment portfolio. So wanted to quickly touch on that, but like I said, the talk on student housing, Betty, I think naturally kind of flows into this next tip that I want to highlight here, which is the importance of avoiding certain asset types . We talk about diversification as a tool or a tactic to eliminate concentration risk. We never want to diversify just to diversify. We want to be strategic with respect to certain asset types that we're targeting and other asset types that we're avoiding. So can you unpack what this means, avoiding certain asset classes and maybe touch on what some of those asset classes are?

13:10 - Asset Class Rejection

Betty Friant :

Absolutely. We already did talk about the student housing and we're right now not encouraging our investors at all to go into student housing just because there's still so much volatility there in that market. It may be a great investment again sometime in the future, but as of right now, we are just not seeing that as somewhere to be if you really do want to build a portfolio that can withstand a crisis. And so some of the other things to think about right now would be hospitality, hotels.

I read an article recently where they're building more hotels now than they have in years, and that's even when the average income per room has been declining overall for quite a while. People aren't traveling as much as they used to. Business travel is definitely not up as much as it used to be with Zoom meetings being so practical now and so easy to do without having to travel and be somewhere in a hotel.

We just think if you can avoid that altogether right now, you're going to be well served. Again, it may be an asset class in the future that could be back in favor, but for right now I'm just not seeing it.

Senior care , this one almost seems like a contradiction in terms because a lot of us are getting older if that's the goal. But if you're talking about nursing homes or dementia care or assisted livings right now, there is so much litigation, there's so much legislation in the works after this whole senior housing sector just went into a tailspin during Covid, just the high exposure to all the regulatory risk. And on top of that, just employees trying to keep employees, the turnover, nursing shortages, licensing, there's just so much going on in that industry that you can have an operator do something wrong and not mean to, and all of a sudden they lose their license, they can't pay their rent, and especially if you have debt on that property, you are toast. It's just not going to be good for the generational wealth that we're all trying to create.

Oil and gas , oil and gas, salt, water drilling, things like that. Boy, those are things that everybody hears about that sounds so kind of sexy maybe, I don't know. But when you are on the scale of risk versus not risk, that is way up there as far as risk and many of us who are investing in DSTs, we're not, right now, trying to roll the dice to see if we can make huge returns on something. Now that could happen, granted, in a DST or in real estate, but we're trying to keep things a little bit more sensible. And then to invest in something like oil and gas where they may not even hit oil where they're trying and the expenses continue to go up and just the nature of the world being able to influence the cost of oil and gas where if Saudi Arabia or Russia or whatever's happening in the world can affect the cost of oil that just comes right down to the real estate that we're talking about.

And if we go green, there you have it, maybe we don't need as much oil as we used to use. So again, it's just a very, very risky category. And to try to bulletproof, crisis proof your portfolio, avoiding these I think are going to be something to really consider.

Matt McFarland :

Yeah, I couldn't agree more. And what I liked that you said earlier, that is, sure there is the potential for these asset classes to maybe be more attractive in the future. Some of them have performed well in the past, but once again, we're talking about ways to build a crisis resistant real estate investment portfolio. So we're not necessarily saying that you can never make money in any of these property types. Obviously, that would be absurd. There's plenty of investors that have participated in these different ventures. But if we're talking once again about how to build a crisis resistant real estate investment portfolio, which many of our investors, many DST investors are seeking to do, then these are some of the asset types that we want to avoid. A lot of these have a cyclical nature to them. The boom and bust type investment types, hospitality is a great example of that.

When the economy's doing really, really well, people are traveling for leisure or in business, the hotel industry does very well. As a result, when the economy's down, when new technologies come out, that certainly would affect an asset class like a hotel much more than say a multifamily property or a distribution center or more of these core real estate asset types that have proven to be more stable and mission-critical over time. So I think that that was really, really helpful.

I want to kind of shift gears a little bit, Betty, for this third point. We mentioned this a couple of times throughout these first two, but I want to talk a little bit about the different access points to real estate. We're all familiar with the traditional form of ownership, buying a local piece of property and self-managing. We're obviously kind of more in the business of providing different co-investment opportunities where investors can buy an interest in a DST or fund or another kind of private placement. So would you unpack what we mean by this kind of considering different access points and maybe some of the potential advantages to that?

19:52 - Real Estate Access Points

Betty Friant :

Yeah, that's good to break it down. We've been throwing around the term DST and probably a lot of people on the call already know what it is, but the Delaware Statutory Trust is basically where you get to invest in a property, kind of like buying a slice of pizza instead of owning the whole pie and getting the whole pie. So you get to buy a slice of these asset classes. And the ones again that we are the more conservative ones where basic food groups, multi-family, medical office distribution centers, even self storage, something where there's multiple tenants perhaps in the property. And these properties are typically very stabilized. It's not that you're going out and buying raw land typically to be able to get the income from it. Typically, it's something where it's already in motion, it's already existing and you get to have a piece of it so that you can diversify, you can generate that passive of income.

You have a manager, an asset manager who's watching over the property. And because of where we are right now in almost April, even at the end of the year, the tax paperwork is just done for you. We're all looking at our taxes right now and in the DST world, you just get a 1099 for the top line of your schedule. You get the and expenses form that gives you the middle lines on your schedule and that gives you the net and that's the money you got during the year. So it's pretty much done for you, which at a certain point in life when you're looking for a lifestyle change and not wanting to always be the one, not only responsible for the day-to-day operations of your real estate, but also to get rid of the liability of that real estate. Because if you have a manager in your apartment buildings, if somebody has a trip or a fall or a dog bite or something worse, the manager doesn't just take care of it, they come to you and now it's your problem.

Or if you had a tenant like Starbucks and they decided not to pay rent during covid, that's your problem and you've got to figure out what to do with it. So having these properties that are managed for you completely passive are a very interesting way to go. And there's a couple different ones. The DST is the one that's the most popular right now. There used to be one that we saw more often called a tenant in common tic , but we're not really seeing that anymore. It had some difficulties attached to it that made the DST typically a better choice. But now we're seeing also some private real estate investment trust and some up rate. It's another exchange called a 721 UPREIT . Well, let me go first to a public rate. In a public rate, what you're doing, if you buy and sell those shares in that REIT and it typically has debt on it, you're buying and selling from other investors.

So that can be very volatile up and down with the stock market. So even when the stock market crashed, you can have the REITs' crash right along with it, even if it has nothing to do with the value of the real estate underlying in the fund, the bucket of properties that are there.

In the private rates or private funds, it's a little more interesting because you really are talking about the net asset value of the properties in the fund. And if you did a 1031 exchange into a DST, and then if that DST happens to be bought by a REIT, you might be given the opportunity to perhaps go up into that REIT as another income tax deferring strategy. And so now you're in a REIT with multiple properties, multiple asset classes, asset tenant types, everything else. And so it just gives you another way to invest. I think those are the main three that are out there right now. Do you have others that you want to bring up?

Matt McFarland :

No, I think that was perfect. And I think one of the benefits that a lot of our investors are seeing with respect to these co-investment opportunities or investing in more of a fractional ownership type setting, whether that's a fund, a DST, a REIT, et cetera, is that it provides not only diversification into more of a institutional caliber real estate deal or buckets of real estate deals depending on how the DST or fund is set up. But beyond that, in a private setting, it provides insulation to public sentiment, right. We've seen huge volatility swings in the stock market that is ultimately driven by headlines and public sentiment that a lot of our investors in these various private real estate settings have had to deal with it. The only thing that matters for them is they own interest in a piece of property, the tenant or tenants are paying their rent.

So the cash flow stays consistent. And for a lot of our investors, I think as they're looking at the entire portfolio, they potentially are targeting segments that have a little bit more insulation to some of the public domain at large, which can be attractive.

And then on top of that, when we're talking about the DST specifically, those are 1031 exchange eligible. So investors who are selling an appreciated piece of rental property, those investors of course would be motivated by the ability to defer taxes through a 1031 exchange in transition away from active management. So a lot of valuable tools out there and interesting access points for accredited investors who are looking to diversify through different access points and take advantage of some of the unique attributes that these various funds have to offer. So that was great, Betty. I know we're kind of coming up on the half hour here, so we'll leave one more just as we close off. Kind of the last tip to build a crisis resistant real estate investment portfolio is avoiding leverage if possible. So can you kind of unpack that a little bit and what I mean by if possible for 1031 exchange investor, cash investor?

27:15 - The Importance of Avoiding Leverage If Possible

Betty Friant :

Yeah. If you're in 1031 exchange then than the two kind of simplified rules after you do all the 45-day stuff and the qualified intermediary stuff, the two easiest rules to think about are that you have to use up all your cash and you have to replace your sales price. So a lot of people think if they sold a property for a million dollars and they have 700 cash, they think, well, all I have to do is spend my 700 and I'm home free. But that's not true because that $300,000 mortgage would be called mortgage boot and you'd pay taxes on that. So if you're in a 1031 exchange, you have to replace your debt or come up with cash. I've had a number of investors recently who have just said, "I don't want debt. I'm done with debt." Just because of all the reasons I'll go over in a minute, but I'm done with debt.

And they'll come up with cash. So they still invest in a million dollars worth of DSTs, but instead of replacing the debt, they're coming up with cash to do it. If you're investing as a cash investor in DSTs or funds, you can still stay debt free. Many of the REITs that we were talking about earlier that are publicly traded all have debt on them. And it just seems to me that if you have an certain amount of income coming in on the REIT and your interest charges go up, seems to me that your dividend is likely to go down. But if you're in a fund that has no loan on it, interest rates go up, doesn't really matter to the fund that all the properties are just owned debt free . So you avoid things in real estate like prepayment penalties or 10 year balloons or when you're trying to sell a property and you could have sold it, but the prepayment penalties are too big or you want to sell it, but you can't because you can't get another loan on it or just all kinds of stipulations in loans.

Sometimes in a loan, the bank has the ability to hold all the rental income for something as simple as a credit tenant who maybe bought another store, another brand, I think it happened to Family Dollar and Dollar Tree. When one bought the other one, it affected their credit rating for a little while. So sometimes the banks could just say, well, we're going to hold all the rents called a cash flow sweep until the situation gets rectified. So if you don't have any bank involved, then you don't have to worry about that. So anytime you can be unleveraged, I think that's the way to go. So you're looking at asset classes that are conservative, not doing the asset classes that are really risky, trying to stay debt free whenever you can. Any other tips to kind of wind it up or wrap it up?

Matt McFarland :

No, I think that was really great. The one caveat I want to add is that there certainly are benefits to taking on debt as it relates to real estate. That's certainly the case. However, once again, for the purpose of this discussion, we're talking about ways to build a crisis resistant real estate investment portfolio. So this is for investors who are seeking to position their investment principle as conservatively as possible. And one of the easiest ways to do that is to not involve a third party lender. There's no third party, there's no ability for them to foreclose, and you have the ultimate holding period possible in front of you to hopefully realize that the full business plan of that particular investment and hopefully exit out the other end in a positive manner. So I think especially right now with where interest rates are and the effect that is having on the bottom line cash flow for a lot of these leverage opportunities, we're really bullish on the debt free approach, specifically for investors that are seeking to eliminate risk as it relates to their principle.

So I think it's important to mention that because we do offer both types, we do have leveraged opportunities available and those certainly make sense for some investors, but not for an investor that has the ability to stay debt free and is looking to once again build as crisis resistant of a real estate investment portfolio as they possibly can. So I think we'll go ahead and end it there. Betty, I want to say thank you again for your time and all the valuable insight you brought. I thought this was a really fun topic and conversation and relevant conversation to have. So thank you for being here.

Betty Friant :

Yeah. Could I add one quick idea to the end of it?

Matt McFarland :


Betty Friant :

Okay. So I talked about the fact that you have to replace debt. I know that sounds really confusing sometimes. So I wanted to suggest to anybody who might be curious is to ask your Kay rep to do just what we call a sample DST portfolio. And if you give us your numbers, we can make it meaningful for you. So if we know your sales price and the how and the amount of money you think you're going to net, it's just a really interesting way to see how DSTs could be a good part of your portfolio to help you diversify. And again, as we say, help create a crisis resistant portfolio to build wealth, preserve wealth, and try to mitigate as many losses as possible.

Matt McFarland :

Absolutely. Yeah, I appreciate that. And we always encourage our listeners if anything's unclear or there, there's a lot more here than we have time for today, please do reach out to your Kay Properties representative. Happy to walk you through any questions and further elaborate off of some of these concepts. So want to thank you again Betty, and thank all of our listeners for spending a half hour with us today on DST Essentials with Kay Properties.

We do host this call live every Friday at 11 o'clock Pacific or two o'clock eastern. So we do invite you to join us next Friday on DST Essentials. And with that, I wish everyone a great rest of your Friday and a wonderful weekend ahead. Thanks everyone, and take care.