Delaware Statutory Trust DST 1031 Difficulty Giving up control

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Delaware Statutory Trust DST 1031 Difficulty Giving up control

Isaac S.
Member since 2018 · 563 posts · 562 votes

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.

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Mike Jacobson
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.

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  • Account Closed
    Wilmington, NC · Member since 2017 · 4 posts · 4 votes
    5y

    Question for those of you who have invested in DSTs, and then later applied for a mortgage:

    The mortgage lenders we've tried to work with don't seem to understand DSTs, which creates headaches trying to get a mortgage done. Has this been your experience? Does anyone have a lender they can recommend that understands DSTs. This would be for a cash-out refi on a NC rental property.

    Thanks in advance for any suggestions. 
     

    1Reply
  • Dennis L.
    Investor · Seattle, WA · Member since 2017 · 11 posts · 3 votes
    5y

    following. great info on DST's on this thread. thanks!

    0Reply
  • Mike Jacobson
    Rental Property Investor · Rochester MN · Member since 2018 · 64 posts · 106 votes
    5y

    Mortgage on DST's. I have found that you cannot go through a normal lending institution, They will lead you down the path that you will get the loan...In the end they will require documentation that is near impossible to get and it will end. You must find a local bank and possibly a commercial lender to understand the DST situation.

    1Reply
  • Kelly Pierce
    Realtor · Sacramento, CA · Member since 2019 · 61 posts · 21 votes
    5y

    Just want to jump on this thread as this all affects me too. :)

    0Reply
  • Rw Pastore
    Member since 2018 · 5 posts · 1 vote
    5y

    Thank you everyone for participating in this thread. I spoke with a few brokers and they advised that if you are using a DST with funds that are retirement intended and close to retirement it would be better to buy an actual NNN property. Your thoughts?

    0Reply
  • Randy Bloch
    Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
    5y

    Agree it would be better…but comes down to how passive you want to be. To buy NNN property you need identify a property, analyze the deal, set the rent or work with a broker. If don't want to do these tasks or don't have the knowledge to do them….a DST is better.

    0Reply
  • Rw Pastore
    Member since 2018 · 5 posts · 1 vote
    5y

    yes just wondering if anyone has actually lost money{principal} investing in a DST? Can the Trust go bankrupt? has one ever did? I heard of one experience where the client lost some principal after the 5 year period as the DST had JCPenny holdings. The client was saved by having diversified, and came up positive on his other DST's so it was a net zero loss. Don't know if this true, just a story. I asked my accountant about DST's - no experience.Hence I am here.

    1Reply
  • Randy Bloch
    Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
    5y

    U can go bankrupt in either scenario so not a consideration from my POV. U can invest in a DST that is much more diversified than single tenant NNN lease. Multi tenant NNN can gives u some diversification if you have the money. Picking the right deal will critical in both scenarios in my opinion.

    2Reply
  • Joe SeraBusiness Member
    MD · Member since 2021 · 29 posts · 16 votes
    5y

    @Rw Pastore

    Both NNN properties and DSTs are passive investment vehicles that are appealing to people looking to retire and that no longer want to actively manage property. Both have their pros and cons. Both appeal to different investor profiles.

    Often times NNNs are more attractive to higher net worth investors. There's a lot of competition for NNNs in the $1-2mm range and many of these deals tend to be lower quality properties, eg. Dollar General in a tertiary location.  The people that are buying NNNs intelligently and as a retirement vehicle are typically buying them all cash or with very little debt.  They focus on the higher quality tenants & properties, which start at about the $3mm range.

    Also if you're planning to 1031 exchange and buy a NNN, you should start looking for your replacement well before closing on your relinquished property. Especially if you have debt you need to replace and will need to get financing.

    In regard to DSTs, there must have been some confusion from the brokers you talked with...DSTs are designed for investors that are looking to retire and 1031 exchange into something completely passive. The investor profile is typically someone that's looking for capital preservation, while looking to make a conservative ROR along with some capital appreciation. Most DSTs are all cash or 40-55% LTV.

    It's important to go with high quality DST sponsors that have a track record of success. There's about 90 DST sponsors, but 15 of them account for 99% of all DST assets raised.

    Right now we like inflation resistant asset classes-- multifamily, self-storage and MHCs.

    1Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    5y

    I'll add that when it comes to DSTs, understanding how much debt and how it is structured is relevant to understanding the risk and the investment. Greater amounts of leverage may put your equity more at risk if there is a downturn in the economy. Having the leverage on the property increases the amount of property you can use for depreciation. If you invest 100K and the LTV is 50% the you have 200K of property to depreciate to help shelter your income.

    Understanding the debt is one part of the due diligence every investor should undertake. Of course there are many other aspects to the due diligence, including knowledge and inspection of the properties.

    3Reply
  • Kyle Winther
    Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
    5y

    Pasco is a strong DST company as well is Capital Square. If you invest into a reputable dst company like Inland, Pasco, Capital Square, etc. they have long standing track records. They have been through the 2008/2009 real estate crash. I wouldn't be concerned about bankruptcy with these large dst companies. It is is the smaller dst companies that are more at risk of going bankrupt. In the case of a dst company going bankrupt, they can utilize the springing LLC trust to spring out of the dst, refinance their mortgage, and spring back into the dst for another 10 year interest only financing.

    Happy to touch on this in more detail if any one wants. :) 

    2Reply
  • Rj MoSab
    Member since 2021 · 1 post · 1 vote
    4y

    Great thread! Who are the best DST brokers (not sponsors) you recommend working with please? Alternatively, which Registered Investment Advisor (RIA) do you recommend working with to get DSTs, since RIAs they tend to be more neutral than brokers?

    2Reply
  • Nick C.
    Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
    4y

    This is a great thread with tons of information.  Just found BP by doing a search to learn about 1031's and thought I'd share my story.  I would appreciate any comments/suggestions/criticisms.

    We purchased a vacation rental cabin outside of Pigeon Forge, TN in 2012 and have utilized a management company since that time. Never thought we'd sell but the value has more than tripled and I want to utilize the profit to invest in a DST through a 1031 exchange. I would then use the money from the DST to purchase and pay the mortgage on another cabin in the future when prices come back to earth and I won't have to put it on a rental program. I'm not an active owner in that I use a management company but I spend a good deal of time fixing/improving things myself so I don't have to pay someone else.

    We still owe just over $100K on the mortgage and expect to have approximately $500K to invest in a DST. Is a DST a good strategy? Is it reasonable to expect 5-6% annually? Should I put all the proceeds into one property or split?

    I had never heard of a DST until my financial advisor mentioned it. Looking for additional recommendations and suggestions. Thank you for your insights.

    5Reply
  • Kyle Winther
    Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
    4y

    @Rj MoSab - We are a DST broker and have access to multiple dst companies. I would be happy to help you out. Send me a message and ill help answer any questions.

    @Nick C. -It depends on the replacement property to want to acquire. The DST will provide you the passive income, but the current rates are around 3-5% because of the currently property values and the underwriting of the DST sponsors. I would say your strategy is good, you are saving on the capital gains tax. You will receive the passive income, and the potential appreciation when the DST property sells. You are parking your money and looking to get back into the real estate market when prices stabilize or come down. I talk to A LOT of clients who are utilizing this strategy. What i advise them to do is to 1031 exchange into a multifamily dst. Multifamily DST properties have a lower cash on cash return, but seeing larger appreciation than commercial properties. The average hold time for multifamily properties is coming down to the 3-5 years range, rather than the 5-7 year average.

    I would be happy to discuss this with you in more detail anytime! 

    1Reply
  • Isaac S.
    OP
    Member since 2018 · 563 posts · 562 votes
    4y
    Originally posted by @Nick C.:

    This is a great thread with tons of information.  Just found BP by doing a search to learn about 1031's and thought I'd share my story.  I would appreciate any comments/suggestions/criticisms.

    We purchased a vacation rental cabin outside of Pigeon Forge, TN in 2012 and have utilized a management company since that time. Never thought we'd sell but the value has more than tripled and I want to utilize the profit to invest in a DST through a 1031 exchange. I would then use the money from the DST to purchase and pay the mortgage on another cabin in the future when prices come back to earth and I won't have to put it on a rental program. I'm not an active owner in that I use a management company but I spend a good deal of time fixing/improving things myself so I don't have to pay someone else.

    We still owe just over $100K on the mortgage and expect to have approximately $500K to invest in a DST. Is a DST a good strategy? Is it reasonable to expect 5-6% annually? Should I put all the proceeds into one property or split?

    I had never heard of a DST until my financial advisor mentioned it. Looking for additional recommendations and suggestions. Thank you for your insights.

    Thanks for posting! I started this thread a few years ago, when I first heard about this sort of 1031 investment.

    I eventually decided to pull equity out of the asset that I was contemplating doing the 1031 with.  Now I'm using the capital to grow/diversify the portfolio. 

    IMHO, the main issue with what you described is that the disposition of the DST property, may not coincide with your next upleg acquisition. However, their are structures like reverse exchange, that could potentially give you some more flexibility with your acquisition window, the reality is that you are at the mercy of the DST sponsors management timeline. If the future vacation property type is abundantly available and can be easily acquired at any time, the aforementioned concern is less of an issue.

    Please post your experiences when you do it.

    Best of luck!

    1Reply
  • Nick C.
    Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
    4y

    @Kyle Winther thank you for your feedback, I really appreciate it.

    1Reply
  • Nick C.
    Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
    4y

    @Isaac S. thanks for starting this thread, it's full of great information and exactly what I was looking for. Even though we've owned an investment property for 9 years, this is all still new to me and I'm learning about things I had no idea existed, like DST's. It's very interesting and I wish I had started earlier.

    When we bought our cabin, our thought process was to only rent it for as long as it took to payoff the mortgage and then use it for personal use only. I wasn't trying to get into real estate investment for any other purpose than supplementing and paying off the mortgage. Now that the property has appreciated so much, I'm looking to sell and invest in a DST. I'll use the cash on cash returns to pay the mortgage for a personal use property in the future. I'll get to the same point as my original goal but just using a different path.

    And....I'll continue in real estate investment through DST's in the future.

    I'll certainly continue to update our progress.

    3Reply
  • Kyle Winther
    Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
    4y

    @Nick C.

    Not a problem at all. Is your cabin currently listed for sale?

    0Reply
  • Isaac S.
    OP
    Member since 2018 · 563 posts · 562 votes
    4y

    Hey @Nick C. , yeah that makes the most sense to use the DST proceeds as a secondary income and just keep 1031 exchanging as each DST matures over time. From what I have heard, if you stay with the top 3 sponsors they have enough ofofferings at any given time and have pretty stable performance records in general, as long as you do your homework.

    Look forward to hearing about what DST you choose.

    1Reply
  • James Sun
    Member since 2018 · 30 posts · 5 votes
    4y

    DSTs are very high in front load fees (6-10%). If you decide to go the DST route, make sure you go with a RIA who rebates part of the front end commission to offset part of that load. Do not waste your time on DST Brokers who drive you around to visit the offices of Sponsors and say they visit the properties to make sure they look good. These brokers offer 0 value during the due diligence process. They usually just sell from the top 5 DST sponsors. There is no real due diligence being done.

    3Reply
  • Rick Kane
    Member since 2021 · 2 posts · 0 votes
    4y

    @James Sun couldn't agree more...I don't want a salesman looking to collect a big fee, I need someone that can help me understand how these things fit into my overall plan. Sadly I didn't find out the RIA route was an option until after my second exchange.

    0Reply
  • Nick C.
    Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
    4y

    @Kyle Winther  it just went up for sale today.

    1Reply
  • Nick C.
    Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
    4y

    another question for those on this thread. Is there any advantage to paying off my mortgage before engaging in a 1031 exchange into a DST?

    1Reply
  • Joe SeraBusiness Member
    MD · Member since 2021 · 29 posts · 16 votes
    4y

    @James Sun We're RIAs and that's exactly how we work.

    0Reply
  • Kyle Winther
    Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
    4y

    @Nick C. - congrats on listing your property! There is no need to pay off the mortgage. You can go into a leveraged dst portfolio and replace the debt in your transaction. We have access to many different leveraged dst portfolios. Feel free to shoot me a DM, email, or call and would be happy to answer any further questions 

    2Reply
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