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.
@Nick C. Keep in mind that most DSTs are about 50-55% LTV or less.
The answer to your question is somewhat subjective depending on personal preferences...The most important thing to keep in mind is that you'll need to match your debt and equity in order to execute a tax-free exchange. You can always take on more debt, but less will create taxable "boot."
Rental Property Investor · San Jose, CA · Member since 2017 · 11 posts · 3 votes
4y
Currently researching DST's as a 1031 upleg alternative or possible place to park our proceeds for the next +-5 years giving the hot RE markets some time to hopefully normalize. One issue I see for this strategy is the property I'm selling (scheduled to close escrow in a few weeks) is not encumbered by any financing and it seems that most of the desirable multifamily DST's are 40-50% LTV with interest only loans. So at the end of this DST term when I "un-park" and 1031 back into a solely owned building I will need to then finance at least the same % the DST was financed at.
Any of you 1031 or DST guru's know a way around this? I guess I could just keep rolling DST's with this portion of our rental portfolio but in the long run I hope to do better then 4-5% returns.
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
4y
when you 1031 back into solely own building why not take on 40-50% debt? It is modest leverage so it will help you returns as you hope to do better than 4-5%.
1. It's important to know that you don't technically have to replace the debt. You can use your own cash and as long as you purchase at least as much as your% of the net sale you'll still defer all tax. Most folks don't have the cash so they end up taking out new debt to match.
2. Like you said, you can always roll into another DST. Or you could end up going into a zero coupon DST to eat up the debt and use the rest of the cash to purchase a brick and mortar asset. This would just mean that your 1031 purchases two replacement properties.
3. You could also take the attitude of @Randy Bloch. 40% - 50% leverage isn't hard to come by. And I'm guessing that you're anticipating a jump back into the market after a correction. In that case you'd be wanting to beg borrow and steal every penny you could to purchase real estate. So some responsible debt won't hurt you at all.
Don't forget that theres some positives in assuming that debt. First it's non-recourse so it disappears from your personal balance sheet. Secondly, putting $500K of cash into a 50% leveraged DST means you are purchasing $1,000,000 of the DST. That means more depreciable basis, and more appreciation (and amortization if it's an amortizing loan).
Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
4y
@Kevin Hubbard - If you are looking to park your proceeds to get back into the RE market in 3-5 years, a multifamily DST is your best option. Multifamily dst portfolios are seeing a shorter hold time of 3-5 years with the growth of the RE market. You are correct, most multifamily dst portfolio are leveraged around 40-50%. When the multifamily dst properties sell, you will need to replace the debt from the dst portfolio. You can 1031 exchange out of a dst into a physical property when the properties sell. You can finance your replacement property to replace the debt from the dst. We have many clients who utilize this strategy. If you have any questions, feel free to contact me directly.
Pasadena, CA · Member since 2019 · 136 posts · 148 votes
4y
@Kevin Hubbard - Dave Foster did a nice job of outlining the mechanics of transactions. The hard part of investing is sifting through everything on the list and picking the best opportunity. The nice thing about DSTs, much like a publically traded equity, there is so much information that has to be filed for each offering that if you have the time and expertise, you can really understand the good deals from the bad. You wouldn't buy any "house" just because a "house" is for sale. You shouldn't by a "DST" or a "stock" just because it's for sale. It's just doing your own research that has made you a good investor in the past.
The nice thing about DSTs, is there are entire research companies dedicated to 3rd party analysis on every individual DST offering. I'd start there.
I'm new and have enjoyed reading and learning from this thread! We are in the middle of doing a 1031 ourselves and I researched DSTs staring a year ago as a plan B. I'm a real estate broker in Utah and knew how difficult it would be to do a 1031 in this market if we didn't have something lined up prior to the sale and learned about DSTs and started researching different offerings. When one of our properties fell through we determined it may be good to diversify and put the left over funds into NNN as everything else we put into Residential rentals again. After much research we are leaning towards ExchangeRights NLP-52 that was just released for these reasons. A-we have money left over from our 1031 and are identification period ends in 9 days. B-They project a 6% return with monthly distributions which is higher than what we can find in any other replacement properties C-Its a diversified NNN package with essential businesses D-Their track record even through Covid was 100% rent collection as they are all corporate leases not franchise leases D-We love the option that we can Upreit, cash out or 1031 again. E-All their past offerings have performed at or above the projections F-We are debt free and actually was attracted that we could benefit from taking on the non recourse loan. Has anyone invested with ExchangeRight as I know they are not one of the bigger sponsors but their fees are the lowest from what we can see and its our understanding they get paid based on performance which keeps them motivated to manage properly. Is my research correct and does anyone have insights that I may need to be aware of before we commit to identify this as our last purchase?
@Sandi Bates A lot of investors are hesitant to invest in NNN properties these days given the current and expected inflationary environment we're in combined with leases that have fixed rent escalations. If inflation outpaces the rental escalations the NNN DSTs will not hold their value and you'll more than likely end up getting absorbed into their UPREIT.
I'd recommend looking at DSTs in more inflationary adjusted asset classes like multifamily, self-storage and manufactured housing.
Cincinnati, OH · Member since 2021 · 32 posts · 27 votes
4y
First experience with a 1031 exchange and DST. Let's see how this goes!
Sold our vacation rental and have put the proceeds into two DST offerings. Both are multi-family apartments and one has a 3.9% distribution rate and the other is 4.01%. Both were offered by Capital Square.
First experience with a 1031 exchange and DST. Let's see how this goes!
Sold our vacation rental and have put the proceeds into two DST offerings. Both are multi-family apartments and one has a 3.9% distribution rate and the other is 4.01%. Both were offered by Capital Square.
Congrats and best of luck! My clients who are no longer hamstrung by daily upkeep and repairs experience a tremendous sense of relief investing passively.
First experience with a 1031 exchange and DST. Let's see how this goes!
Sold our vacation rental and have put the proceeds into two DST offerings. Both are multi-family apartments and one has a 3.9% distribution rate and the other is 4.01%. Both were offered by Capital Square.
Hi Nick- Best of luck. Newbie here getting an education on DST's. Did you use an RIA or go the broker route?
Investor · Dallas, TX · Member since 2015 · 25 posts · 3 votes
4y
New to this post but what a wealth of information, thank you all!
Am considering selling my 15 single family homes this year and investing the equity in DSTs. I understand (mostly from this thread) they are generally higher fees and low(er) returns vs other 1031 alternatives. But the ability to diversify by asset type and geography is very attractive, and the true passive nature is something I’m looking for as i get older.
One question for those with DST investing experience … how did you go about analyzing the offerings? What did you focus most closely on and what helped you decide if the investment was strong or weak? And were there any key numbers or ratios you could use across offerings to give you a quick comparison of the different deals?
Thanks in advance for any thoughts and for everything already shared!
You are asking the right question, and like any real estate deal, due diligence is massively important. The challenge you'll face is that, even though this is fundamentally real estate, you're moving from the SFH retail world to evaluating institutional assets within asset classes that are likely less familiar.
The first thing you'll notice is that the sponsors (who are the Trustees of the trust and could also be thought of as the general partner of the deal) will issue a PPM (private placement memorandum) that is a 300-500 page document. This document is everything that is necessary to issue the deal. A worthwhile investment isn’t just one with attractive cash flow projections; it must also base those projections on sound underwriting assumptions. Those assumptions are all documented within the PPM.
Information from the sponsor is important but should serve as the starting point. You'll want to collect research that goes far beyond the documents and reports provided by the sponsor.
I'd work my way down this list when looking at the buildings:
Specific to the properties: Acquisition Costs, Environmental Reports, Appraisals, Property Condition Reports, Inspections
Because these are likely commercial properties, much of the value is connected to the tenant, so evaluating the tenant becomes crucial: Conditions of Leases (duration, escalations, extensions), Balance Sheets, Competitors, Historical Performances, Credit Scores, Macro Trends
Local market factors that you are used to pulling: population density, population growth, unit type inventory and growth (multifamily), median income, etc...
Sponsor track record: Every sponsor has a list of the previous offerings within the PPM. Although the past won't predict the future, it's important to understand their expertise and previous success.
There are financial services firms that focus on real estate backed securities as a significant part of their practice. I'd try to parse out the sales people from the analysts with a simple question, "Can you show me an example of a DST that your firm is choosing not to sell, based on your evaluation of the underwriting? And can you walk me through that offering in great detail?"
Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes
4y
Great advice Jon! I love how you point out that there is more to research than just the cash flow.
The PPM is a vital resource to learn about the offering. They are intrusive and long, but will provide all the financials, projections, demographics, financing, fees, insurance, etc. I am licensed to offer DST's and work with the top sponsors in the dst space.
I help clients review the ppm, but my clients get the most knowledge when we schedule a call with the dst sponsors directly.
@Russ Olivier - If you have any questions regarding the dst, I would be happy to answer them for you.
Investor · Leawood, KS · Member since 2019 · 8 posts · 6 votes
3y
I have a commercial building under contract and am now considering investing my proceeds into DST's. Been through most of the thought processes above but due to time constraints and uncertainty on going it alone right now in a property or properties, DST's are the probably the best route for this bucket of cash. I got a presentation from Inland through my financial advisor and because of this thread, am also researching other DST's. Feel it best to diversify into a few to manage risk and liquidity. I hope I am on the right track. Appreciated reading every response on this post.
I have a commercial building under contract and am now considering investing my proceeds into DST's. Been through most of the thought processes above but due to time constraints and uncertainty on going it alone right now in a property or properties, DST's are the probably the best route for this bucket of cash. I got a presentation from Inland through my financial advisor and because of this thread, am also researching other DST's. Feel it best to diversify into a few to manage risk and liquidity. I hope I am on the right track. Appreciated reading every response on this post.
I have a commercial building under contract and am now considering investing my proceeds into DST's. Been through most of the thought processes above but due to time constraints and uncertainty on going it alone right now in a property or properties, DST's are the probably the best route for this bucket of cash. I got a presentation from Inland through my financial advisor and because of this thread, am also researching other DST's. Feel it best to diversify into a few to manage risk and liquidity. I hope I am on the right track. Appreciated reading every response on this post.
Keep us updated on your progress Diane!
Will do! I won't rule out any option other than DST's as in a perfect world I would do both for diversity and a little more liquidity. Just may not work out timing wise.
I have a commercial building under contract and am now considering investing my proceeds into DST's. Been through most of the thought processes above but due to time constraints and uncertainty on going it alone right now in a property or properties, DST's are the probably the best route for this bucket of cash. I got a presentation from Inland through my financial advisor and because of this thread, am also researching other DST's. Feel it best to diversify into a few to manage risk and liquidity. I hope I am on the right track. Appreciated reading every response on this post.
@Diane Forgy congrats on selling your property! If you have any dst related questions, diversification by sponsors, or available portfolios, I can help. Feel free to reach out with any questions! 😃
Pasadena, CA · Member since 2019 · 136 posts · 148 votes
3y
One cautionary reminder is that the sponsor (Inland, etc…) is the seller. Going to the sponsor directly is like asking the homeowner what’s wrong with their house. Good thing to do. But I wouldn’t skip the inspector!
