DST and 1031 Exchange

10 Replies

@Tim Zajicek

My clients have found them very useful not only for passive ownership, but appreciate their flexibility with investment amount and portfolio diversification (by sponsor, tenant, type, liquidity, and geography.) Can be used for a plan b in identification, absorb debt in an exchange, or using all of the proceeds to complete an exchange.

Biggest objection is lack of say with timing; the sponsor/trustee makes all decisions on when portfolio is liquidating.

Good luck!

@Tim Zajicek DSTs are potentially good for investors who are looking to be more passive in their real estate investments. A lot of these investors have owned their properties for a long time and are tired of active management (toilets, tenants and trash), don't want to pay cap gains taxes, and still want the cash flow for retirement. 

I agree with the pointers that @Kyle Kadish touched on, especially regarding the objection part. Once you give up the keys, the sponsor has control of your asset. You have to be completely comfortable with the sponsor and management team that will be handling your investment. There are a lot of newer sponsors entering the space so I would pay close attention to a sponsor's track record and history of asset dispositions.

Yes I've helped clients close on both a 1031 and Delaware Statutory Trust. Each has a place in tax deferral and creating and preserving wealth. The Delaware Statutory Trust is like a mutual fund of properties which you can 1031 exchange into. You give up control on timing and fees can be high. My experience is the return is around 5% or less and the assets are held for 7-10 years at which point you can 1031 into another Delaware Statute Trust or 1031 into your own individual deal. 

Pros: no more management personally, non-recourse debt, passive, most are 2-5 properties in different locations which helps to diversify your investment. 

Cons: high fees, low return, cannot sell out at your own timing ....if you want to buy another deal and its by definition illiquid. Also buying into today's market is buying in a seller's market which is not ideal and you may be overpaying. You're facing this with both the 1031 and Delaware State Trust. 

In today's market, I prefer the Deferred Sales Trust. Pros: Option to Sell high and buy low (sit on the sidelines all tax-deferred and buy back into CRE real estate all tax-deferred) , liquid ( funds can be invested in Stocks, Bonds and Mutual Funds), Funds can be directed to develop real estate ( all tax deferred), funds can be directed to be loaned out for real estate deals ( all tax deferred). I have a client right now who is selling at a 4.5% cap and plans to move the funds into a deferred sales trust and then direct them to a hard money lender who will loan the funds out at a 12% interest rate. Cons: Ongoing Fees, Paperwork, getting comfortable with the structure.

@Tim Zajicek I posted this in another thread and copied it to this location.

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.

@Tim Zajicek

Pro's: professional management and due diligence, diversification across asset type/sector/location, flexibility in investment dollar amount and placing debt, passive real estate for retirees or disinterested owners, fast efficient closing to adhere to 1031 exchange timeline, backup identification or leftover funds placement. 

Con's: no direct management decisions, illiquid with no secondary market

@Tim Zajicek best way for me to retire and not pay all the gains or have to manage the properties any longer. 

pro's: fast, professional management, diversified, large 50+ million dollar portfolios, stated interest rate

con's: no control over portfolio in management decisions