Why Do 1031 Investors Choose DST Properties Over Traditional NNN Properties?

Many clients that have been interested in doing a 1031 exchange into a NNN property find the DST 1031 property particularly attractive. These same clients often think that the only way for them to become passive owners of real estate is to purchase a NNN leased property; however, they often are very skeptical about placing such a large amount of their net worth into one single NNN property.

The DST 1031 option has become an increasingly popular option for investors that were previously considering a NNN property. Here are some of the reasons why 1031 investors may choose DST 1031 properties over traditional NNN properties:

Access to the same type of NNN leased real estate and tenants

Tenants such as CVS, BJ’s Wholesale Club, Walgreens, Bridgestone/Firestone, Advanced Auto Parts, Sherwin Williams, FedEx, 7 Eleven, Starbucks and Dunkin’ Donuts have been structured and used as DST 1031 properties in the past. Many investors love the idea of this caliber of tenants potentially paying them rent each month.

It is important to note that actual tenants will vary depending on the various DST 1031 properties available at the time of your exchange. The companies listed may not be represented in all programs and may not always be available.

Diversification
Many 1031 investors realize that placing a large portion of their net worth into a single NNN property is just not prudent. The idea of placing $2 million into a 7 Eleven, $1.8 million into a Starbucks or $4-15 million into a Walgreens or CVS makes clients nervous from a concentration risk standpoint.

The DST 1031 property provides a potential solution to investors wanting NNN leased properties and national tenants but with the ability to build a diversified portfolio of them. This is in contrast to “betting the farm” on a single piece of NNN property.

This concept is similar to how, often times, investors do not place 100 percent of their retirement accounts into a single stock and instead purchase mutual funds or exchange traded funds (ETFs). This is because they do not want their retirement accounts to “live or die” off of the performance of a single stock.

It is important to note that diversification does not guarantee against losses or guarantee profits. Investors should speak with their CPAs and attorneys for guidance as to if a DST 1031 property investment is suitable for their particular situation prior to considering a 1031 exchange.

Inflation protection potential
The way that the U.S. government has been printing money and so cleverly titling it as quantitative easing causes many investors to believe that inflation is coming. The problem with most NNN leased properties is the flat to miniscule rental increases that will potentially cause values to suffer. For example, Walgreens and CVS often have leases with primary terms that are from 20-25 years. During this 20-25 year period, the rent that they pay to the landlord will stay the same for the duration of the lease. Inflation could potentially wreak havoc on a static income stream such as this.

DST 1031 properties allow 1031 investors access to asset classes that historically have shorter lease terms than most NNN properties, such as multifamily apartments and self-storage properties, without the burden of active management. Asset classes with shorter lease terms can potentially be attractive to investors because when the leases are reset, the tenants are theoretically paying a greater amount than the year before, allowing the landlord to pass along any potential inflationary pressures to his or her tenants.

DST 1031 properties are “pre-packaged” for 1031 investors to be able to close on immediately

For an investor in a 1031 time crunch, a DST property that has been pre- packaged can be a potential solution to a very real capital gains tax burden. The 45-day identification period of a 1031 exchange moves very quickly, and investors wanting to purchase a single NNN property have very real risks, such as financing not coming through, issues with third-party reports such as appraisals and environmental reports and sellers not disclosing material items in the property’s lease, such as early termination clauses or co-tenancy clauses, which can change the economics of the previously agreed-upon purchase price.

Much can go wrong with trying to purchase a NNN property. The DST 1031 provides a solution to investors not wanting to be burdened with the closing risks, resulting in a potentially failed 1031 exchange of a NNN property.

For a free infographic on why investors choose DSTs over NNNs, go to kpi1031.com/register and sign up.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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