If you have found this article, you likely understand the many benefits that exist for real estate investors who exchange their property for DST, Delaware Statutory Trust fractionalized replacement interests.
Since 2004, when DSTs qualified for the 1031 exchange rules, those benefits include saving vast amounts of tax via the 1031 Exchange (opens in new tab), preservation of the “step-up in basis” rule, moving away from loan guarantees, cash calls and the three T’s: Tenants, Toilets and Trash.
Delaware Statutory Trust 1031 investors buy into institutional-grade multifamily apartments, distribution facilities, medical buildings, office space, retail, national brand hotels, senior living, student housing, and storage portfolios. Subject properties are commonly over $100 million and far out of reach for smaller “do it all yourself” individual investors.
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The peace of mind of a tax-advantaged cash flow distribution each month and the removal of all the headaches that go along with managing real estate make the DST a fabulous option for many real estate investors.
Although many people feel like the Delaware Statutory Trust may be the greatest thing since sliced bread, we would caution that rarely is one thing the best idea for everyone. The following is a list of five types of investors who should probably avoid the DST option.
1. Investors who are not yet accredited
Investors who have not yet built enough wealth and/or equity are prohibited from entering into a DST arraignment via Securities Regulation D, under the Accredited Investor Rules. This rule states that to invest in private placement investments one must have a net worth of over $1 million excluding one’s primary residence or income requirements of at least $200,000 per year (for singles, or $300,000 for couples filing jointly) for the last two years.
For a greater explanation of those requirements, I highly recommend you sign up for my course, Master The 1031 Exchange (opens in new tab). Below is a quick taste of what you can expect.
2. Younger wealth builders
Younger investors who are seeking a higher risk/return profile might not yet be ready for a DST solution.
Young wealth builders might be in a greater position to take on substantial risk and in turn reap the benefits of higher risk returns than what a more seasoned investor might be willing to do. Should those risks cause the younger investor to lose income or equity, the younger investor usually has more time to overcome such losses.
Generally, most DST investors tend to be more seasoned investors who have a few battle scars and life experience than that of younger investors.
3. Do-it-yourself types
Some investors have a personal preference for finding tenants, negotiating leases, managing the books and records ranging from property taxes, rent rolls, bank loans, lease agreements, tenant issues, property repairs and so on.
A DST is a more passive investment where all of those things are done by institutional investment grade real estate firms. If you are the sort of person who would really miss those things and if you find significance in those activities, you might find the DST solution less appealing.
4. Anyone with a high need for liquidity
Investors are people and therefore very different from one another. If a real estate investor has a high need for liquidity, then the investor might want to avoid real estate altogether, and to that end, a 1031 exchange might not be the best idea for an investor who needs more access to their cash.
A straight sale of your real estate where you recognize capital gains might be what is required in this instance. This would allow the investor to invest in more traditional stock and bond portfolios that can be turned into cash in short order.
Investors’ high need for liquidity might be due to the need for raising cash for a larger leveraged deal, the anticipation of a divorce, health concerns, speculation about the economy, or for many other possible reasons.
Again, the DST is an ideal solution for many investors, not ALL investors.
5. Developers and construction company owners
Someone who owns a construction and/or development company might want to use a 1031 exchange where they could use their construction company to build their new replacement property, therefore, benefiting two of their interests.
Properties that are “to be built” generally will have a higher risk-return profile as well and may be better suited for a younger investor. Moreover, the individual may have a keen skillset and ability around a certain and specific type of property, such as car washes, storage facilities, dentist and vet clinics, retail, etc.
DST offerings are offered through registered investment advisers.
Accredited investors can view multiple DST offerings on my company's site (opens in new tab) as well gain as access to:
- A knowledge center
- Videos
- Master The 1031 Exchange masterclass
- Referrals to CPAs and Qualified Intermediaries
- FAQs
- and more.
If you wish to speak with our team at Provident 1031, call us at 281-466-4843.
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