Delaware Statutory Trust DST 1031 Difficulty Giving up control

113 Replies

Hi Everyone,

Thanks for this discussion. Adding our experiences:

A few years back we decided to sell off our rental properties as they became vacant to eliminate the stress and headaches of TTT. After considering our options we decided to either cash out and pay capital gains tax, or to 1031 into DSTs to defer capital gains and depreciation recapture. 

We are probably ideal candidates for 1031 into DSTs. We no longer want any headaches, have no need for control of properties or management. Just mail us a check each month and 7-10 years down the line we'll either cash out, upreit, or 1031 into another DST. Low rate of return on equity is fine, especially since we're avoiding capital gains, depreciation recapture, and have no effectively taxable income on the current cashflow. Since the DSTs we consider seem to be conservatively underwritten, we believe the risk of losing our entire investment to be extremely low. We're not too concerned about appreciation if they generally rise and fall in value with the overall real estate market.

We are currently in 3 DSTs. Two with Bluerock, one with Nexpoint.

Both Bluerock properties are class A multifamily, one in the Washington DC suburbs, the other in the Boston suburbs. The Bluerock properties have been rock solid. Zero interruption of cashflow due to Covid. Minimal non-payment of rent from tenants, lower expenses due to common areas being closed, higher occupancy rate as a defensive tactic.  Bluerock's reporting is great, and payments timely. We're 100% happy with these two investments thus far.

The Nexpoint DST is a portfolio of 3 properties, value-add class B, located in Austin, Charlotte and Atlanta suburbs. Reporting and rent payment from pales slightly in comparison to Bluerock. Cashflow reduction of ~10% starting March 2021. Still, we're satisfied with this investment. We view these value-add class B properties as good diversification from the class A BR properties, and all 3 are in solid metro areas. We also think there is greater possibility of appreciation if the value add is well executed.

Overall, we're happy with our DST investments and will continue investing in DSTs in the future unless something changes drastically.

Of the many other sponsors out, we're most interested in investing in a Passco DST. Exchange Right's necessity retail DSTs are intriguing, but splitting out the multiple property for tax filing sounds like a pain when it time for tax filing. We've been working with Archer Investors, and have been happy working with them.

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. 
 

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.

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?

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.

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.

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.

@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.

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.

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. :) 

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?

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.

@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 Cortolillo -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! 

Originally posted by @Nick Cortolillo :

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!

@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.

Hey @Nick Cortolillo , 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.

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.

@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.