Looking to get feedback from others that have 1031 into DST Delaware Statutory Trust.
We have tons of equity, low debt, fully depreciated, and I have been dealing with toilets, trash, and tenants, for 20 years...I often fantasize about passive income, because owning a 90 year old apartment building, is not passive at all. I tell people that I start my day with a list of 100 things to do, and by the time i finish the first 10, the list is already back up to 120 and I'm lucky to end the day back at 100.
Maybe this is a moment of weakness, but, it sure seems like I have them more and more often and that lifestyle of a passive investor analyzing DST's every 5-7 years, and checking on quarterly reports keeps seeming more and more attractive!
Am I missing something? I know fees are high, but, the passivity is worth it, to me, as long as the cash flow and appreciation are consistent. Hell, even just not loosing equity and steady cash flow would be fine.
Rental Property Investor · Rochester MN · Member since 2018 · 64 posts · 106 votes
7y
We sold our hotel in the spring of 2018. We had 2.2 million cash and had to replace with debt over 4.1 million. I attempted to find quality NNN properties to purchase. I had been looking for several years prior to the sale. Research 2016, 2017, 2018. I have not had commercial rental experience.
Cash flow, Freedom and not wanting to loose what I had gained were high priorities.
My goal was exceed $100,000 per year cash flow.
I was being shown high quality NNN properties with 15 year leases backed by top companies like Gander Mountain, Shopko, Many Dollar stores in some small communities with higher enticing cap rates. ( as you know they have all failed) I pictured myself making a $35,000 per month payment with no tenant. Then I thought I could diversify and get several in the 1 to 2 million range. There is much competition in that range and lower cap rates. I figured a closing fee when I sell would be a one time 6%. Then an ongoing annual management fee would be 4%ish, and more if you get a class C apartment with lots of work needed. (but higher cap rate) Limited diversification.
Freedom was very high on my list so I did not want to deal with this. I thought about taking cash but was unwilling to give the government 850K. I thought even if I did DST's and lost 30% of the equity, It would be the same as giving it to the government. (Probably not technically accurate). Doing a 1031 allowed me to invest $850,000 more whether a NNN or DST. Money you can collect cash flow from for years to come.
I looked at financial adviser's who promised 30-40K per year return on the cash after taxes. I felt sick about that number. They charged a .75 to 1.25% management fee. This is 10% over 10 years.
I had been looking at DST's. Up front assembly fees about 10%. So I looked at it like 10% management fee up front that covers the assembly of the product and sales of the product to people like me. Very comparative to purchasing something myself, yet total freedom.
I now have properties in Florida, Texas, Missouri, Washington. I have Apartments, Mini Storage, Hotel, Sr. Housing. Checks come in ACH monthly and I love it. I hope it continues.
Not all the money went into DST's however we did not pay any boot. Every dollar was reinvested.
We now exceed $10k per month in DST cash flow. DST's have met my goals as far as cash flow, freedom, diversification and lowering taxes. I have been in DST's less than one year. I do not know the outcome long term. I have invested with DST providers like, Moody, Inland Capital, Passco and Bourne. As you can tell by my writing I am not a financial wizard. I am impressed with the many people on the Bigger Pockets forum and I am learning from all of you. Thank you.
I recently got an up vote on one of the post from this thread, and I re-read one of your posts and it made want to check in and see what the last 8 months experience with DST was?
Rental Property Investor · Rochester MN · Member since 2018 · 64 posts · 106 votes
6y
@Isaac S
Returns have been very close to what was stated in the ppm's. One of them lowered the monthly payout to the same as previous year because it didn't meet projections. It was supposed to go up about 1/4 % I was very happy with my tax return this year. Which way more than made up for it. So far I still love the DST's. My priority right now. Is freedom, not maximizing every dollar with my labor. That of course is something each of us must decide at what age is enough enough. For me the number was debt free and 15k per month. I hope this helps.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@Mike Jacobson thanks for keeping us in the loop. It’s nice to get a follow up, as you usually don’t hear from the marketing people/sponsors what happens after someone invests in a particular project.
How did you find the reporting? I’m assuming it was quarterly, but did you also get frank assessments, upcoming goals, etc? Or just ‘here’s your quarterly profit’ type of thing?
I also think regarding diversification (a strength of DST vs STNL) is that you might as well stay diversified with future DSTs going forwards. Meaning, I think you have to choose your path a priori of either focusing on direct NNN ownership or get a slew of diversified DSTs. Only variant is if you have leftover boot on a NNN purchase, you can get a one off DST to close that gap. I just wonder how many investors with several $millions actually go for only DSTs as their primary portfolio?
Investor · Winston Salem, NC · Member since 2016 · 60 posts · 18 votes
6y
@Mike Jacobson - I too really appreciate you updating this thread. Can you tell us how depreciation/tax strategy works with your DSTs? Do I understand right that you carry the remaining depreciation from your upstream property into the DSTs?
Rental Property Investor · Rochester MN · Member since 2018 · 64 posts · 106 votes
6y
@Amit M. The company that has the best communication of the DST's that I have is Passco. They even send out notifications of property status if hurricanes are headed toward a property and their plan. Reminders that they are covered by insurance and have a plan in place for quick recovery if something did happen. Annually most DST's give budget, past year performance, Variance to projected, and forecast of future. With Passco who missed a projection, they discussed what changes they have made and are making to correct the situation. I went all in with the DST's. Over 2m. I diversified between 8 investments, 7 of them being DST's. My "DST Guy" informed me that with that diversification...they will not all come to an end at the same time. So I will not have the chunk of cash to pull out and to something big. With diversification I don't worry to much. I have always taken chances.
@christopher brown I am not the best at the depreciation calculations. I tend to use round about numbers. (sometimes that gets me in trouble). I just had the best tax return year ever. ex. If I have a million in cash in the DST's and I carry another million in non-recourse debt, I get to write off and depreciate the whole 2 against my 1 mill invested. This is how I understand it, but I would get others to input the accurate summary of how this works. They tend to flip at 5 to 7 years when the curve on depreciate value and time come together???? way over my head...
I'm leaving for a trip to Japan right now. If I don't respond right away. Sorry.
Specialist · New York City, NY · Member since 2019 · 53 posts · 28 votes
6y
@Isaac S. I always like to say that a suitable candidate for a DST must fit the profile. That being said, it has to be somebody willing to give up control and let go of the reins and collect that mailbox money. Either that or somebody that needs help matching debt and equity, needs a 45 day back up ID or has scraps of equity left over with their QI. Regardless, if you go thE DST route I always strongly suggest going with the rock solid sponsors that have a track record in the space. My two cents anyway 👍
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6y
I find it more rare for people retired with money to go all in with a DST and give up full control like that. As mentioned lots of additional boot money or if someone comes to me with a 1031 exchange and 250k they will be looking at a crap rural property or junk tenant with bad financing if they do not want to add any additional funds to the exchange.
It can make sense for that person to take the 250k and own a partial amount of a 10 million DST property they could not buy on their own. DST are heavy fee laden because of the way the companies have to package and sell them to make money.
Some of my clients instead might look at zero cash flow properties with pay down/re-advance features where they put a nominal amount in for equity requirement say 15 to 20%. This way if 1031 proceeds are 50% of the purchase amount then 30 to 35% of funds are re-advanced out after closing keeping the 1031 exchange intact. This way the investor has a quality property where all the payment is going to the mortgage so equity builds up fast and they can take the re-advanced funds and WAIT for the right opportunity for extra yield plays.
@Rob Pecha Thanks for the two cents. Yeah, I agree with you. When I first started the thread I was just learning about DST's and my knee jerk reaction was to 1031 my primary asset(37 unit apartment building in Hollywood, with very little debt) and dump all the appreciation into the DST, and walk away from toilets, trash, tenants. I must confess that I still try and convince myself that it would be a safe and profitable play, and the more I keep track of the reputable larger sponsors, like PassCo and Inland, the more comfortable I get. Also, I think the various DST asset types and regions, has required that I learn about and pay more attention to micro/macro-economic conditions and regional RE Investment variables that I did not focus on, in the past.
I'm curious what "the profile" of a DST investor is? And/or a rough break down of what percentage of DST investors are in any given profile?
@Joel Owens Thanks for chiming in! I really like reading your posts and I'm still very thankful for the few times we have talked on the phone, and I look forward to possibly working with you in the future. Reading all your posts on BP helps me to indirectly get to know you, and I really like your NO BS style and high level of knowledge about the topics you post about.
ZCF is pretty advanced financing method, for me, and I like the concept for the exact reason you mentioned, I just get nervous about anything that is highly leveraged and then the phantom income in 7-12 years, risk of the asset going dark if it's a STNL, etc, etc...I have a basic idea of the pros and cons of the ZCF structure, but, I need to learn more and/or have someone hold my hand through a detailed analysis of how it would apply to my specific situation and how the cons are mitigated.
Hows your schedule been lately? Working on any projects that would make sense for my situation? Or any interesting project in general?
I am new to BP. Wow, like drinking from a fire hose. :-) I have a 1031 client looking for replacement options. I've done multiple exchanges but never into a DST. They will have $1.7m to roll. Probably wouldn't put it all into DSTs but like it as a plan B if we don't find enough acceptable direct investment options. I see Passco, AEI, Bourne, Moody recommended by posters. Anyone familiar with Realized1031 or 1031CrowdFunding?
Professional · Lake Forest, CA · Member since 2017 · 10 posts · 5 votes
6y
Great conversation. To set the record 1031 Crowdfunding is a sponsor in Senior Housing. The principals have been in the Senior Housing space for 15 years. The principals have also been involved in syndicating over $1 billion in industrial real estate as well as Senior Housing and has been in the Financial Services industry since 2001. 1031 Crowdfunding has the largest inventory of DST's in the country.
Inland,Passco are good sponsors and great people. We at 1031CF analyze deals based on the asset type geographical location and it's economic ability to overcome the upfront expense so that principle can attempt to be protected prior to suggesting any DST.
We are licensed advisors but also have over 20 years in the commercial real estate.
Specialist · New York City, NY · Member since 2019 · 53 posts · 28 votes
6y
@Isaac S. I would say that among the profiles of DST investors I personally encounter in my practice, approximately 50-60% fall into those that flat out no longer want to deal with the TTTs, while the remaining 50-40% are scattered amongst A) those that need a backup scenario for their 45 day ID, B) those that need help matching up their debt/equity requirements and lastly C) those that have boot left to deploy after their primary choice(es). Simple as that, at least in my experience.
@Rob Pecha Thanks for the breakdown. Since I originally posted this thread, I have had time to think about it. Your breakdown makes perfect sense and is actually the exact way I currently view the DST financial instrument.
DST are a great tool for the common 1031 situations you described, but for very large amounts of equity there are competing STNL MTNL investments, that get me enough removed from the terrible T's, and satisfy my risk concerns, along with having self control of exit and usually better yields.
When I first started this thread, I really was hyper focused on passivity, but I have tried to implement more immediate and less drastic measures to help reduce the stress, so I can hang with my current primary asset and squeeze a good amount of appreciation, that is still available.
NEWBY (here) - four years experience with DST investments
Our DST portfolio includes 11 investments in 8 states, of 5 different sorts of properties. We like the diversity, performance, hands-free stability, and - of course - income.
However, within that portfolio are some problem children. Madison (senior living) and Nelson (student housing) have suffered from a combination of poor planning and poor execution, as our income from those investments has either stopped or diminished. The overall portfolio, however, is doing well at >6% tax-free (plus appreciation).
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@Henry Eisenson Hi and thanks for that info. Do you mind sharing which DST company(s) you are working with? Also, what do you mean by "tax free" gain, and did they provide you with estimated appreciation numbers? Thanks
Investor · Trabuco Canyon, CA · Member since 2015 · 6 posts · 6 votes
6y
I sold a property a couple of years ago and exchanged into 5 different DST's. They can make sense depending on your tax liability, as it did for me. As mentioned, the bigger Sponsors are very professional and report very well. You get a financial statement (not a K-1) that clearly lists all the info you need for your taxes. The fees are high - especially the broker fee. But you can try and negotiate that down. There is no Promote and no investment from the Sponsor (usually) - so there is no alignment of interest, but the better Sponsors want to keep their reputation. Usually the properties are newer class A as they can't hold too much cash reserves for repairs as it creates too much of a cash drag and reduces IRR. They are somewhat limited with the DST structure which can add risk, so the better Sponsors know how to manage that. Investing as an LP in a non DST investment like a standard syndication offers less fees, more options, great Sponsors, 1031 exchanges, QOZ's, Funds, every asset class etc... 1031's are limited, though especially for your initial investment. You can find some that are debt free, but mostly those are NNN. I stayed mostly with Multifamily as other sectors like Student housing, Senior care, Hospitality and NNN have too much risk for me. I like the diversity and like how they will sell off at different times. So instead of one large cap gain on one property, it is split into 5. This will potentially allow me to pay no tax on the capital gain as I will be in a low enough tax bracket to pay 0 capital gain.
Bottom line is they are very convenient, and simple but more restrictive and higher fees, resulting in a sub-optimal IRR.
Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
6y
@Isaac S. what route did you end up taking? Did you go into a DST? Has your property sold yet or in escrow? Curious to know the route you are going down after reading through this thread.
@Isaac S. what route did you end up taking? Did you go into a DST? Has your property sold yet or in escrow? Curious to know the route you are going down after reading through this thread.
Hey Kyle,
Thanks for reading and posting. I started/continued cultivating about half dozen different commercial brokers, by taking incoming cold/warm calls from brokers for off market offers(calls I used to just hang up on) from their fund buyers and deep pocket private investors, and soon realized(as few of the brokers had warned) that off market deals for this asset are always gonna be low ball, no matter how premium my location.
One thing that became apparent was the strategy of the all the buyers, force appreciation by finding assets with upside, which my property had plenty.
So, I got way more professional with managing the building and enforcing leases, paying attention to the rental comps and in turn improving my NOI. I have managed to improve our cash flow considerably(enough to make it less stressful) and have paid attention to the interest rates for commercial mortgages, which have remained pretty flat and low, making refi-cash-out a very attractive option.
All that being said, I have several refi offers that are very motivated to close a deal because of the large loan and relatively conservative LTV.
So, now instead of the all or none attitude I was having when starting this thread, I have positioned myself to have the option of refi and redeploy that cash out equity into one or several other assets, and hold back some cash for reserves and improving the primary asset in anticipation of squeezing maximum appreciation for a future sale when the prepayment fixed rate period on the refi is over, and ideally at the right time in the economic cycle to get maximum value.
As for my perception of 1031 to DST, the beginning of the thread I was thinking of them as a possible replacement or fix-all solution. However, I think with the amount of equity in play and my financial needs/goals, it would not be a good plan to 1031 into all DSTs. Rather, use DSTs to fill in the gaps and/or satisfy debt requirements to round out a 1031 that would see the majority of the equity go to a fee simple interest in multifamily or NNN property(s).
Any thoughts? Reason for asking? Or ideas to add to thread?
Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
6y
@issac S. - I think you have the right idea to fill the gap and satisfy your debt requirements and defer the capital gains tax on your property. Our firm Winthco Wealth Management works very closely with Inland securities and can provide a strategic solution to replace the debt (boot) with property in a DST which in turn will allow you to have more real estate investment exposure while reducing your overall fees.
I was reading the thread and it was a good topic of discussion and was curious of your outcome and how you proceeded. I am constantly doing market research in the 1031 DST industry to better help our clients.
If you have any direct questions or would like to speak in more detail about your scenario, feel free to reach out directly!
