By Dwight Kay and the Kay Properties Team
Key Takeaways:
- DSTs are real estate investments and should be evaluated accordingly
- A 1% annual fee compounds significantly, often creating a much higher fee structure
- Ongoing RIA fees can far exceed traditional DST commissions
- Monthly cash flow can be reduced by approximately 20% under the RIA model
- Perpetual-life REIT structures can dramatically increase long-term costs
The 1031 Investor Trap: Why RIA "Fee-Based" DST Investing Costs More Than You Think
In today’s 1031 exchange marketplace, investors are increasingly hearing a clever sales pitch from Registered Investment Advisors (RIAs): avoid upfront commissions on Delaware Statutory Trusts (DSTs) and instead pay a 1% annual assets-under-management (AUM) fee.
At first glance, this sounds appealing—lower upfront costs, alignment of interests, and the comfort of a "fiduciary" relationship. But when you apply basic real estate logic, the math tells a very different story.
DSTs Are Real Estate Investments—So Treat Them That Way
A DST is not a stock portfolio. It is a form of real estate ownership blessed by the IRS as like-kind for the purposes of a 1031 exchange.
Investors in DSTs are effectively buying into institutional-grade properties such as:
- Apartment communities
- Industrial facilities
- Medical office buildings
Key Question Investors Should Ask:
What is my expected hold period?
Most DSTs are structured with a projected hold period of 5 to 10 years, though they may go longer depending on market conditions.
A Simple Comparison: Rental Property vs. Ongoing RIA Fees
Imagine you purchased a rental property or commercial building. Would you agree to pay your broker or real estate agent 1% of the property value every year… indefinitely?
Highly unlikely.
Instead, the standard model in real estate has always been:
- A one-time commission of approximately 5%–6%
Why? Because over time, a recurring fee structure becomes dramatically more expensive than a one-time fee. This model would drastically eat into potential returns on your real estate purchase.
The Same Logic Applies to DSTs.
Traditional DST investments follow this structure:
- A one-time fee (typically around 5%, fully disclosed in the PPM)
Under the RIA AUM model:
- Investors pay approximately 1% per year, EVERY year
At first glance, 1% may seem minimal—but over time, it compounds into a significantly higher total cost.
Real Case Study: A 2008 DST Investment (12-Year Hold)
To illustrate this, let's look at a real example of the first DST investment Dwight Kay personally made.
|
Investment Detail |
Information |
|
Asset Type |
Apartment Community DST |
|
Location |
Outside Seattle, WA |
|
Year Purchased |
2008 |
|
Hold Period |
~12 years (full cycle) |
Fee Comparison Over 12 Years:
|
Fee Structure |
Total Fees Paid |
|
RIA AUM Model (1% annually) |
~12% (1% x 12 years) |
|
Traditional DST Structure |
~5% (one-time) |
The Bottom-Line Outcome:
The RIA model resulted in more than double the fees compared to the traditional real estate-style commission.
This is not theoretical—it is real-world math based on an actual investment.
The Compounding Effect Over Typical DST Timelines
Consider typical DST hold periods:
|
Hold Period |
1% Annual RIA Fee |
Traditional One-Time Fee |
Result |
|
5 Years |
5% |
~5% |
Comparable |
|
10 Years |
10% |
~5% |
2x more expensive |
|
15 Years |
15% |
~5% |
3x more expensive |
Conclusion: The longer the hold period, the more the RIA's "fiduciary" AUM model works against the investor.
How RIA Fees Destroy Monthly Cash Flow for 1031 Investors
Beyond total fees, there is a very real and immediate impact that investors often overlook: monthly income.
Why do investors choose DSTs in a 1031 exchange?
- To defer capital gains taxes
- To eliminate management headaches (no more tenants, toilets, and trash)
- To generate consistent monthly passive income via ACH direct deposit
The RIA Fee Structure Problem:
RIAs commonly structure their 1% AUM fee by having the DST sponsor pay them out of the property's cash flow before the investor receives distributions.
Hypothetical Example: $1,000,000 DST Investment
|
Scenario |
Annual Cash Flow (6% yield) |
Monthly Income |
|
Traditional DST (one-time fee) |
$60,000 |
$5,000 |
|
RIA AUM Model (1% annual fee) |
10,000 fee) |
~$4,167 |
|
Difference |
$10,000 less per year |
~$833 less per month |
Impact:
The RIA model reduces the investor's monthly income potential by approximately 20%.
This raises a fair question: How is this a fiduciary approach to 1031 exchanges?
An Even Bigger Concern: Perpetual Non-Traded REIT Structures
Many RIAs are not only recommending DSTs with annual recurring fees but also positioning clients into DSTs that include mandatory UPREIT structures converting into perpetual-life non-traded REITs.
Key Risks of Perpetual REITs:
- Often have no defined liquidity event
- Can last 20+ years or longer (hence the name "perpetual-life")
- Continue charging approximately 1% annually
The Math Over 20 Years:
- 20 years × 1% = 20% in total fees
- Potentially more over longer timeframes
This creates a situation where:
- The RIA continues earning fees indefinitely
- The investor continues paying fees indefinitely
A Fair Question About Fiduciary Advice
RIAs often emphasize their fiduciary duty—acting in the client's best interest.
Investors should ask this simple question:
"How is it in my best interest to pay 10%, 15%, or even 20%+ in total fees over time while also receiving less monthly income, when comparable DST investments are available with a one-time fee structure?"*
The answer:
The math is simple. The RIA model of charging DST investors 1% per year is typically the more costly fee structure for investors and lowers their monthly cash flow by typically 20%.
The Bottom Line: What 1031 Investors Must Focus On
When evaluating DST investments in a 1031 exchange, investors must focus on:
|
Evaluation Criteria |
Why It Matters |
|
Total cost over expected hold period |
Not just upfront cost |
|
How fees accumulate over time |
1% compounds significantly |
|
Impact on monthly cash flow |
RIA fees reduce income by ~20% |
|
Defined exit vs. perpetual structure |
Perpetual REITs have no liquidity event |
Why Experience Matters More Than Ever
The real lynchpin in this entire equation is experience.
Many RIAs and financial advisors offering DSTs today have only been working with these investments for a relatively short period. DSTs have only recently become a hot product at large financial institutions.
The Risk to Investors:
- Advisors and RIAs often lack deep experience with full-cycle DST performance
- They may not fully understand the nuances of DST structures, sponsors, and 721 UPREITs
- Investors can unknowingly become the testing ground for an advisor still learning the space
At Kay Properties and Investments:
- Over 4,000 investors have trusted us over nearly two decades
- Over 10,000 individual 1031, DST, and 721 UPREIT investments completed
- We provide objective, specialized guidance
Note: It is not uncommon for RIAs and financial advisors to personally engage Kay Properties for their own 1031 exchanges because they recognize the value of specialized expertise for their own families' investments.
Final Warning to 1031 DST Investors
1031 DST buyers beware.
The myth of fiduciary RIAs helping you with a 1031 exchange can be a very costly mistake.
The math is the math. Very simple.
Investors must see through the smoke and mirrors of terms like:
- Fee-based advisor
- Registered Investment Advisor (RIA)
- Fiduciary advisor
…and instead focus on actual outcomes.
For nearly 20 years, over 4,000 investors have done exactly that and chosen Kay Properties and its marketplace at www.kpi1031.com for specialized advice and lower fee structures when purchasing DSTs.