5 Ways a DST Can Help Real Estate Investors During a Bad Market
As we approach the end of the year, the economic headlines are not making anyone too comfortable. The U.S., and even the rest of the world, is dealing with rampant inflation, impeding recession, and a rapid rise in interest rates. Real estate investors are worried, and in some instances panicked, about the effect this may have on their investments. Investors are still finding opportunities to sell their highly appreciated assets, but the questions remain: how can I avoid paying taxes, and how can I de-risk my next investment?
Real Estate Investors Need to Look for Opportunities
Many real estate investors are already familiar with section 1031 exchanges, but what lies ahead is causing their uneasiness when they sell their property. When an investor conducts a 1031 exchange, they must replace their relinquished property with like-kind real estate that is held for investment or business use of equal or greater value. The problems that arise within a 1031 exchange in today’s world are often tied to the strict timelines associated with the process.
After an investor sells their relinquished property, they will have 45 calendar days to identify their replacement property and 135 calendar days after that to close. With the rise in interest rates, investors worry about how it will affect their new investment property since servicing the debt has become much more expensive.
At the same time, we are beginning to see companies lay off parts of their workforce as the fed looks to slow the economy to gain control over the cost of living. This can make purchasing short-term rentals, lower-unit multifamily, or non-investment grade single-tenant properties a significant risk. The Delaware Statutory Trust (DST) offers investors an avenue to remove some pain and fear in this process.
Here are 5 Considerations for Investors Seeking a Passive Solution to Their 1031 Exchange:
Ability to Invest Alongside Long-Standing and Most Prominent Real Estate Institutions
The Delaware Statutory Trust programs are built and offered by sponsor companies that manage billions of dollars in real estate. This allows an investor that may have sold a single-family rental property, smaller multifamily property, smaller warehouse, etc., to gain access to institutional quality real estate and leverage the resources of multibillion-dollar companies.
Some of the larger companies in the DST world are Inland Private Capital (established in 1968), Cantor Fitzgerald (established in 1945), and Passco Companies (established in 1998). These companies offer DST investments for real estate investors seeking a passive experience and manage them entirely on behalf of the investor.
Access to Diverse Institutional Quality Real Estate for Low Minimums
When an investor is in a 1031 exchange, they must find a replacement property or properties that will be of equal or greater value than their relinquished one. Depending on the size of the transaction, investors can have trouble diversifying their investments.
The DST offers accredited investors access for usually a $100,000 minimum investment. So an investor that may have sold a property for $500,000 would be able to construct a DST portfolio that can be diversified across the sector, geographic locations, and market demographics. In addition, this investor can take their proceeds and now access several hundred unit class-A multifamily properties, industrial warehouses, student housing, assisted living facilities, grocery-anchored retail, and more.
Non-Recourse Debt Already in Place
With rising interest rates, investors may struggle with finding ways to replace their property of equal or greater value if they have to assume new debt. In the DST, the sponsor is the one responsible for acquiring the debt, which means an investor can receive credit for the debt for their 1031 exchange but not be liable for it.
At the same time, investors get to take advantage of the sponsors’ financing relationships, which often gives them access to more favorable loan terms. In addition, by having the debt already in place by the sponsor, the investors’ concern shifts from whether or not they will qualify for a loan or how it will affect their investment to just making sure the DST investment will satisfy their replacement requirements.
Upfront Due Diligence
The Delaware Statutory Trust comes to investors as a fully packaged program for them to evaluate. DSTs usually provide a fact sheet on the offering and are accompanied by a private placement memorandum.
Here investors can learn about the property’s location, market demographics, value-add opportunities, loan terms, and risks. Since the DSTs are regulation-D securities, this information must be disclosed upfront allowing investors to determine whether or not it is suitable for their needs.
Quick and Efficient Closing Process
The 1031 exchange process has strict deadlines that offer no lee-way. If you do not have a replacement property listed after day 45, you cannot buy it. At the same time, if you cannot close on your replacement property in the full 180-day period, you will owe Uncle Sam.
Since the DSTs are securities, the average time it takes an investor to close on their investment is 3-5 business days. Since the DSTs are already performing assets, investors will begin accruing income on their investment as soon as it is closed.
Reach out today to learn more about the Delaware Statutory Trust and if it is the right fit for you. We can also provide you with our latest list of current offerings!
Disclosures: DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.
There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties, including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, and illiquidity. Investors should read the PPM carefully before investing, paying special attention to the risk section. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax concepts; therefore, you should consult your legal or tax professional regarding the specifics of your particular situation.