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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  • Tony Guardado
    Rental Property Investor · Canton, OH · Member since 2014 · 74 posts · 28 votes
    2y

    I would recommend Archer. They introduced me to DST's 3 years ago and have walked me thru step by step over the years.

    0Reply
  • Natalie Bender
    Houston, TX · Member since 2021 · 51 posts · 28 votes
    2y

    Thank you Tony for the shoot out.

    Hello Isaac,

    Taking the step from active landlord to passive investor can be scary and overwhelming. At Archer we pride ourselves on education, even if that results in DSTs not being the right fit for you.

    Below is my contact information, please reach out and we can due a deep dive to see if DSTs is the right investment for your goals. 

    0Reply
  • Jean Deeb
    Member since 2024 · 5 posts · 2 votes
    2y
    Quote from @Ryan Beatty:

    I've worked with around 30 investors in your shoes before, ready to move passive. I don't think it's an easy decision for anyone, but seeing distributions coming in on time as projected tends to calm folks down. I don't do DST's though, I'm more focused on 1031's via tic's.


    I am interested in this as well for a 1031. Where do I find TIC deals?

    0Reply
  • Rw Pastore
    Member since 2018 · 5 posts · 1 vote
    2y

    Any one know what has been the low in cap rates for DST's in the last 5 years? In 2021 I think they had cap rates of 3%. What percent above the 10 year yield do the cap rate for DST'S usually run? also when the DST is sold what appreciation you can expect to receive?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    2y

    DST's have lots of limitations. What appreciation do they have you ask? Not much in a bunch of cases. Just talk to securities 7 dealers that do raises for capital for DST's.

    Cap rates of 3 IS NUTS. You are just asking for failure investing in that. That is why lots of multifamily larger deals are imploding right now and investors are losing tens of millions as LP's. 

    WHY do people invest in DST's? They are often lazy and do not want to put the work in for choosing the right commercial property to own direct. They want to just sign some papers for their 1031 exchange and be done with it. Doing that way comes with lots of risk as you are just believing what is being sold to you without asking many questions. DST's have their place and purpose but are not the end all to be all investment.

    You need to still make sure the deal is sound and if you need to exit the DST is it allowed later and at what discount would you need to sell off your shares.

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    2y

    As @Joel Owens mentioned above, there have been *a lot* of multi family syndication fails recently. I'm wondering if the same thing has been happening in the DST space? Anyone with some data on this? Please chime in :)

    0Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 803 votes
    2y

    You can find DST's in the 5% range, but why would you invest in these things? Pay the tax and invest in mortgage notes at 12% with no headaches. In a few years your tax hit will be offset by the money your making. You can laugh at the wealthy people bragging about their 3.5% cap chick-fil-a while your taking in 12% +. Corp NNN leases aren't what they used to be. If you do pull the trigger on these things just diversify.

    0Reply
  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    2y

    @Rw Pastore

    My firm tracks performance on DSTs on an ongoing basis - for the last 20 years. Commercial real estate values have changed a lot since 2021. Both interest rates and tenant behavior have had major negative impact.

    Smart buyers can always find advantaged acquisitions from a true financial fundamental real estate perspective in DSTs, but it’s the exception, not the rule.

    Current acquisition cap rates for commercial properties are in the mid 5’s - mid 6’s.

    Agree that 3 cap was insane.

    Happy to talk in more detail offline. I can go pretty deep.

    1Reply
  • Rw Pastore
    Member since 2018 · 5 posts · 1 vote
    2y

    thank you everyone for your replies on DST's. A follow up question is on Hybrid DST's to UPREIT's. Do you still feel the same about the UPREITS? I imagine the dividend payments will vary as well on such products do to market conditions. Does anyone have a idea on a normal range of dividends from UPREITS over a 10 year period?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    2y

    REITS can be more highly volatile where they have super strong years and really negative years for returns.

    An UPREIT is another tool in the toolbelt of investing. There is no magic pill out there that gives ultra returns and is ultra safe there are many investments along a SPECTRUM of risk and potential upside with varying degrees of potential tax benefits and deferment strategies. 

    You have told us nothing of your specific situation and why you are asking these questions.

    I typically deal with investors on NNN type properties where net worth as an individual is 7,8,9 figures. What they want to invest in and why is very specific to the individuals goals and age in life.

    Someone might be worth 100 million and own no NNN and want to be ultra safe for their first one and go Chick Fil A with long term lease. They prioritize in their mind safety over yield. Chick Fil A's are often ground leases where rent is heavily below market. You get rental increases and if Chick Fil a ever leaves the site you often have upside converting to absolute NNN leases with a new tenant closer to market rents. Ground lease own just the land so no tax depreciation usually so not tax advantaged like absolute NNN. Sometimes people are really old like in their 80's in age or older and want to own Wal-mart with long term lease and not worry about anything. They already made their money and in wealth preservation mode.

    Some investors are always focused on yield.

    Without knowing your goals it's a bunch of noise without direction.   

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    2y

    @Jon Taylor so given the info you have access to, can you give us an overall idea of how DSTs have preformed compared to similar apartment syndications over the last several years? How about DSTs in the office, retail, etc. spaces? I'm particularly interested in pre vs post Covid DST acquisitions, and how they have fared. I imagine that some DSTs are failing, but the question is how prevent that is, and what are the circumstances of those DSTs in trouble versus those that are meeting their return expectations. We know that there is a bloodbath in apartment syndications, so I'm wondering how they fared to DSTs.
    Thanks

    0Reply
  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    2y

    @Amit M.

    The Delaware Statutory Trust (DST) structure itself doesn't affect the performance or economic outcome of a real estate investment; it depends on the specific property in the trust available for fractional ownership. There are two reasons DST portfolios have avoided some of the challenges seen in other syndications: DSTs usually have 10-year fixed financing, so debt costs stay constant and sponsors are not forced to sell for another 5-6 years minimum. DSTs are stabilized from day one, avoiding exposure to fluctuating construction costs and lease up risk that can disrupt other syndication structure's pro forma projections.

    Interest rates have broadly impacted asset values, with some asset classes being more sensitive to rate increases than others. However, we have not seen a significant effect on occupancy. The main challenges facing the multifamily apartment sector that we’re monitoring are the rising costs of repairs and improvements, higher insurance premiums, and increasing property taxes. Again, these issues are not unique to DSTs.

    If investors and advisors were careful to select the right asset at the right price (which includes all fees) in the right market, it’s generally performing well despite these pressures.

    1Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    2y

    @Jon Taylor I agree with those basic generalities. But I’m asking in practice how DSTs have fared in the last few years. Have more gone belly up? How about reducing or eliminating quarterly payments? Sure DSTs are more conservative in nature than syndications, but what are the statistics on their overall performance been over the last 5 years? Particularly the DSTs focusing on multi family, as the rise in vacancies and lower rents must have effected them too, especially in markets like Austin, Phoenix, Vegas, etc.

    0Reply
  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    2y

    I'm not seeing multifamily going belly up in the DST market at this time for the reasons stated above. Occupancy and rents are holding up just fine. Debt fixed rate long-term financing.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    2y

    One of my friends has his securities 7 license and does lots of raises for DST's and other various sources of capital needs (inventions, business start ups, etc.)

    More than anything I myself look at the DIRT. If the dirt is amazing then if problem with the sponsor, the structure type, the tenant type, the debt type in the future you generally have options to cure. The reason is so many potential types of tenants and developers will desire that dirt. Now if you paid an insane price or above market rents with an ultra low cap rate and used really low fixed debt for 10 years not hardly ever seen again then you better have some great rental increases and mortgage paydown to help offset.

    Multifamily lots of times the raisers projections are crap. When market shifts they do not meet those projections. If you go into a DST as an option you want it stable and predictable otherwise might as well look at value add with higher cash flow potential and equity upside.

    Example if I am looking at Sams Club to buy all cash for 12 million with my raise that is absolute NNN at 7 cap. I buy for cash and then pay about 6 pref to start to investors but I KNOW Sams Club covers all the variable costs because it says so in the lease. Multifamily if the rent growth flatlines and the costs increase your bottom line erodes heavily and you the GP can't make the projections that were given to LP's to start.

    Cap rates are not all equal which many people do not understand.

    If I buy a Sam's club in Riverdale for 8 million at a 7 cap in no way is that worth the same as a Sam's club in Buckhead GA for 12 million at a 7 cap. One is a phenomenal area Buckhead and the other is more mediocre at best.

    How to analyze investments whatever they are regular syndications, DST's, TIC's comes with experience and time.

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  • Jim PfeiferBusiness Member
    Investor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
    2y

    I have never done a DST or a 1031 Exchange. They seem complicated, lock up your money and have a lot of restrictions. I was an active investor and fully transitioned to a passive investor in syndications. My CPA told me I could either suck it up and pay the tax from selling my active portfolio or do a "Lazy 1031". I chose the latter and ended up not paying any tax on gains from my active real estate. I admit, it was more effective in the days of 100% bonus depreciation, but it still works at 60% and will work if it goes to 0%. I have never really understood why people do the DST or regular 1031 exchange. Here is an article on the Lazy 1031 if people are unfamiliar with that strategy.
    https://passivepockets.com/learn/syndication-basics/lazy-103...

    0Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 803 votes
    2y

    Check out posts by Mike Jacobson.  He is an investor that actually owns these things.  He can tell you the good bad and the ugly. 

    @Mike Jacobson

    0Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    2y

    What Joel said, yes

    DST industry cheerleaders, meh

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Isaac S. It sounds like you’re at a crossroads many long-time real estate investors reach. Here’s a quick breakdown of the key factors when considering a 1031 exchange into a Delaware Statutory Trust (DST):

    1. Control and Management: A DST offers true passivity—no more hands-on management of property issues. You'd receive quarterly reports and distributions without any tenant or repair involvement. However, you give up control over daily property management decisions, and your investment is fully managed by a third party.

    2. Fees and Costs: DSTs have higher fees than traditional real estate, often including acquisition, management, and administrative fees. While these eat into returns, many investors find the trade-off worth it for the passive income and simplicity.

    3. Cash Flow and Appreciation: DSTs typically target consistent cash flow rather than high appreciation. While DSTs do appreciate over time, returns might be more modest compared to active property ownership. Given your goal of preserving equity and achieving steady cash flow, DSTs align well with this objective.

    4. 1031 Exchange Flexibility: Since DSTs are eligible for 1031 exchanges, they allow you to defer capital gains taxes when transitioning from active to passive investments. When the DST property is eventually sold, you can reinvest in another DST or property to continue deferring taxes.

      In short, if passive income with steady cash flow is your priority, a DST could be ideal, especially if you're comfortable with higher fees and giving up control.

      This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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    1. Ian IppolitoBusiness Member
      Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
      1y

      @Isaac S. You can find a ton of DST's to choose from at a website like 1031Crowdfunding.com.

      There are also certain brokers that will often waive many of the upfront fees that are typically charged. These typically don't (or aren't allowed to) advertise publicly and work by referral. If you'd like more information on one of these, then private message me.

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