What are they and how can you benefit?
Real estate investors are constantly looking for new trends or the new “hot” investment. In recent years, Delaware Statutory Trusts (DST’s) have grown in popularity because of their diversification, tax planning opportunities, high-quality asset holdings, and passive nature. Delaware Statutory Trusts are an alternative investment vehicle to a traditional real estate property in a 1031 Exchange. DST’s allow investors to purchase tenant-in-common (TIC) share(s) of an investment fund. These funds can appear extremely similar to a Real Estate Investment Trust (REIT). The trust owns the property, but the investor owns a portion of the trust.
Arguably the biggest benefit of a Delaware Statutory Trust is diversification. The trust can own some, or multiple properties across one, or many asset classes. This allows the investor who would otherwise be purchasing one property to be diversified and invest in multiple. Think of a DST like a mutual fund. Rather than investing in a single stock or property, the DST is a collection of many. The diversification allows the investor to spread their risk out across multiple assets.
Another major benefit is that according to Revenue Ruling 2004-86, Delaware Statutory Trusts qualify as replacement property for 1031 Exchanges. Section 1031 of the Internal Revenue Code allows real estate investors to defer paying capital gains tax when they sell an investment property if they reinvest the proceeds from the sale in “replacement property.” Investors have to identify replacement property within 45 days of the sale and close on the replacement property no later than 180 days from the date of the first sale. These rules can make completing a 1031 Exchange very challenging. Real estate investors often struggle to identify a property of the right price & availability in the required timeframe. A Delaware Statutory Trust offers an easy alternative in that an investor simply needs to pick the trust in which they want to invest. A DST is a great alternative, or back-up plan when performing a 1031 Exchange.
Within the 1031 exchange context, DST’s are even more attractive because they can have low minimum investments. When investors dispose of a lower-class investment and want to invest in a higher-class asset, a DST is often that vehicle, even if it’s a small fraction of ownership. As an example, suppose you’re an investor who just sold a triplex in a third-tier market. Wouldn’t you rather purchase a portion of a high end, luxury apartment development rather than another average triplex?
Many real estate investors I know also want to generate passive income. They’re tired of being the landlord and getting a call every time something goes wrong. These investors want to generate hands-off, “mailbox” money. DST’s can manage the properties on behalf of investors. Investors no longer have to be the ones driving around collecting rent checks. DST’s will do that for you! Many DST’s invest in triple net leased (NNN) properties. Triple Net Leases mean the tenant pays for the “nets” which are maintenance, property taxes, and insurance. Because the tenant pays for these expenses rather than the landlord, there are minimal landlord responsibilities and all they really have to do is collect the rent checks. Examples of these NNN leased properties include Starbucks, Taco Bell, Wendy’s, 7-Eleven, and dollar store properties. The landlord owns the building, but the tenant pays rent and pays for the nets. This structure creates a true “mailbox money” type situation for investors in a DST that invests in net leased properties.
The final benefit of Delaware Statutory Trusts is that investors can also exchange out of them. Let’s say you’re an investor and you invest in a DST as replacement property in your 1031 Exchange. The DST invests in several assets, collects rent, pays expenses, and generates a nice return for you over several years. At any point along the way, the investor can sell their interest back to the sponsor. This sale then starts the clock for another 1031 exchange.
Delaware Statutory Trusts do have a limited size – there can only be 499 shareholders. One of the challenges with DST’s is identifying the correct investment trust before it fills up. Our team of experts can help. We will scour the market to present different DST options and find the DST that is the perfect fit for your needs. Some of the top sponsors in the industry include Fundrise, RealtyMogul, Bluerock, AEI, Madison, Everest, etc. Most of these sponsors offer multiple investment asset options. For example, from 2014 through the end of last year, AEI sponsored 15 DST funds which purchased 57 properties in 23 states.
Whether you are new to real estate investing, or a seasoned veteran, there is no reason why you shouldn’t consider investing in a Delaware Statutory Trust. If you have questions or are interested in learning more contact me anytime.
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