I'm a part time buy and hold investor, currently selling an investment home in California and looking to perform a 1031 exchange. I recently learned of DST's and have done some preliminary research but can't find any comments from investors on BP's with experience in them. I generally know how they work and have spoken with an advisor about them, but are there any INVESTORS out there who can let me know their experience with these DST's, positive or negative? After investing in DST's, would you do it again? The alternative for me would likely be to invest in a multi-family residential property or a couple SFH's.
@Bradley Reber , You'll find in general that your return is almost always lower with a DST than with a fully owned hard asset. This is the "passive tax" applied by the syndicator. The DST is sometimes considered "safer" because you are spreading the risk over a larger number of investors and the tenant/end user of the syndicated property are typically larger national credit companies. There is also the notion that DSTs are superior because of the cachet of being limited to accredited investors. I've not seen that play out. In my mind the most secure asset you can own is one that you yourself fully own and have deed to. But there absolutely is a place for a fractional 1031able asset that can provide you with both the tax deferral and dependable return.
There are other 1031 qualifying assets that would work as well. TICs present a somewhat similar structure to a DST with fewer investors, smaller assets and a return that is generally (not always) superior to a DST. NNN leases are probably the next rung above that towards individual ownership. Again, fewer investors, more recourse, superior returns.
Hi @Bradley Reber , I've researched a lot of 1031 exchange Fund/DST options, when doing my overview of the industry.
The advantage they have is outsourcing the management to someone else. The disadvantage is that the fees are many, often hidden and really high. ( many times around 9 to 10% when you have them all up).
Many of these 1031 exchanges are into extremely safe properties, which is good from a capital preservation point of you. But the side effect is that they have very little chance of appreciating in value. So when it comes to liquidating time, many investors are going to find themselves upside down, after taking into account all the high fees.
So you have to run the numbers to compare the tax savings you would get, versus what you are paying fees, both immediately and when you liquidate.
If you’re choosing between 1031 exchange into a fund/dst and a property that you directly own, the latter is almost always going to be much cheaper and better financially.
Thanks for the replies. A little extra research has confirmed basically everything you've mentioned above. Sounds like a good tool for asset preservation, less suited for appreciation, a good option to defer taxes via 1031 particularly if you are in a market that is high and you wanna take a break from active real estate investing and wait till things cool off a bit. I think what I'll end up doing is to do half and half... purchase a property AND put the rest into DST's. That way I diversify in every way. Wish me luck!
Hey @Bradley Reber ,
It sounds like everyone has pretty much hit it right on the spot. Investing in California can be tough and largely rely on the capital gains for return. It also sounds like you are mostly a passive investor. If your goal is cash flow, California is hard because cap rates are low which can result in a lower NET income on a buy-hold property you own/manage yourself. I would suggest comparing the NET income (after servicing debt/fixing broken toilets etc.) to the NET income of a couple DST structured investments. But if you have time and enjoy managing your real estate holdings, doing it yourself can be fun and rewarding! Good Luck!
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