Many investors turn to DST properties due to the tax benefits and the hands-off nature of managing the investment. Compared to a traditional real estate investment, DSTs allow investors to collect a more “passive income” while simply providing the capital necessary for the investment.
In this article, you’re going to learn about DST investments and how to identify the best DST properties to invest in.
What is a DST?
DST stands for Delaware Statutory Trust and it’s an entity that holds the title of real estate investments. This might sound similar to the way a Limited Liability Company works and there are similarities. The big difference is that a DST property qualifies for a 1031 exchange according to the IRS ruling 2004-86. There are added tax benefits to investing in a Delaware Statutory Trust.
This method of creating tax-deferred real estate exchanges is commonly used by investors that don’t use real estate as their primary income source. They might have a few properties on the side and a great way of limiting the amount of taxes you need to pay on capital gains is to reinvest the money made from the sale of a property into a DST.
For example, the investor may own a small office building. The investor sells that building as he or she ages with the hopes of cashing in on the investment but they also don’t want to lose out on the monthly income. The problem is, as these investors age, they don’t want the responsibility of having to manage the property, collect rents, and be available around the clock when something goes wrong.
So, they hire a property management company. That requires vetting, paying the management fees, and likely more time still chasing people for money.
Instead of going through all that, a DST is already set up to manage the properties so investing in a DST is a smart choice for aging real estate investors who still want to capitalize on their investments without feeling the burden of managing them.
What Are DST Properties?
A DST property is a property operated under the Delaware Statutory Trust. A “sponsor” will essentially lease the units, manage them, and collect the rents. Without the investors, that sponsor would not have the money to do so. As an investor, all you need to do is provide the capital necessary to expand the investment portfolio and find new properties.
There are many ways to get involved in a DST property but the standard investment seems to be around $100,000 for a DST 1031 property. This allows investors to diversify their money across multiple properties. There are also different leverage ratios to help the investor take on greater debt. Many of the DST 1031 properties are offered cash/no debt to remove all financing risks. This creates a more sound investment on your end if you have the cash to put into the DST.
Defining a DST 1031 Exchange
The big question a lot of people have about DST investments is if you can 1031 exchange out of a DST and the answer is yes. There are two parts to this that you need to understand.
You have a full cycle sale and a prior to full cycle sale. In a full cycle, you can 1031 exchange because this means that the DST sponsor has sold the asset per the original plan and now each investor has the same options they did in the beginning. Investors can then exchange into another property to manage on their own, exchange into another DST, or pay the capital gain taxes.
In a “prior to full cycle sale,” since DSTs are considered illiquid, investors should only do a 1031 exchange if they intend on staying in the deal for the full life of the investment. That could mean having your money locked in for as long as ten years. If you’re not prepared for that, you might want to wait for the sale to go full cycle.
There is a third option as well. Kay Properties offers a DST Secondary Market where investors that want to sell out early and 1031 exchange may be able to. It’s made possible due to the sheer volume of DST sales we see on a daily basis. The volume allows us to provide these resources regardless of the situation.
Identifying a Sound DST Investment
If you’re interested in investing in a DST, you’ll want to know what to look for and what red flags to avoid. Here are some of the factors to consider:
Minimums – You want to pay attention to the minimum because they can range from $50,000 to $100,000 and above. Good DST providers will offer a wide assortment of investment options for you to choose from.
Cash Flow – The cash flow is the percentage or share of cash flow paid monthly. Each property should have a clearly listed cash flow.
Management Information – Bad management can make investing in a DST a difficult experience. You don’t have any control over the management of the properties so you’re relying entirely on the management company. Make sure you choose a seasoned DST sponsor with plenty of experience.
Diversification – Most DSTs will allow you to diversify your investment across different assets and geographical locations. This creates a higher rate of return on your investment.
Leverage – You need to pay attention to the leverage because that will tell you how much of your investment needs to be upfront and in-cash. It’s generally a good thing if it’s all cash/debt free if you have the money to invest because you don’t have to worry about the other investors being over-leveraged.
Understanding a DST investment is simple when you know what the terms are. You’re essentially investing in a structure responsible for finding and managing the properties while you collect a share of each month’s revenue. It’s as simple as that. These are generally sound investments and the tax benefits are present as well.
If you’re interested in looking at the DST properties, click here and sign up to see our current offerings.