DST, 1031, exit strategy, retirement advice

28 Replies

hi all!

i was hoping to bounce some ideas/get advice on an exit strategy / retirement planning / DST. i apologize if i jump around since there's so much running in my head.

anyway, so a little about me: i'm going to be 50 yo at the end of this year, single, and no kids. therefore, i'm leaning toward starting a sabbatical / retirement January 1, 2024. i like my main job in the health field but i'd also like to live a little and travel (i want to travel the world before i'm physically not able to anymore) without worrying about my patients or answering tenant calls.
i currently own 5 multifamily properties i purchased from 2009 to 2013 and they are all free and clear. i currently manage them myself as well as doing about 90% of the maintenance on them. i will hire out stuff like garage door springs, water line replacement, new roofs to name a few things.

why i want to sell:
a) i'm at a point where i don't really enjoy getting calls to come fix things anymore. at first it was really neat to learn how to remodel and fix things watching Youtube but i want less responsibilities now.

b) my return on investment was a lot better 10 years ago when i first bought the properties (properties were not worth as much then) but i talked with my accountant recently and i'm only getting about 3.5 to 4.0% ROI (mainly because property values have risen so much in the last decade). i could raise rents (i believe my rents are below market) but i also don't like the idea of having to repair a unit if someone decides to move out. all of my units have long term tenants

c) the good news is that the property values here in South King County have gone up by a fair margin over the last ten years. unfortunately, so have the property taxes which are taking a huge chunk out of my net income

d) i've always considered myself to be a fair landlord, often times too understanding, but the new rental laws seem to be favoring the tenants more and more. thankfully i only have one tenant taking advantage of the rent and eviction moratorium

e) i'm one roof / siding replacement or one bad tenant from decreasing my ROI significantly

f) bad tenants suck, they basically suck the joy out of you. thankfully i only have 1 out of 11 that suck.

exit strategies:
a) sell the properties and pay the capital gains taxes. unfortunately with my current tax bracket, it's my understanding that i will be looking at about 30% (correct me if i'm wrong) in capital gains taxes and depreciation recapture

b) deferred sales trust, i like the idea of being able to invest in other investment vehicles but i'm not a very trusting person. who's this 3rd party trustee that's going to be managing my money? i guess i have more faith in a large company like Passco or Cantor Fitzgerald

c) NNN, since my equity is split into 5 properties, i doubt i'll be able to sell them all at the same time and roll it into a NNN property. plus i don't like the idea of all my eggs in one basket

d) i could hire a property manager but they really eat up the ROI and i still have to pay for the materials and subcontractors they hire to fix things anyway.

current plan / train of thought:
so my current plan is to sell my properties during 2022, use a 1031 exchange and invest in DST (Delaware Statutory Trust) that specialize in multifamily properties preferably in states without state income taxes. i need to talk to my realtor but i figure i might be able to get $2.5 to 2.75 million after fees and taxes to invest with. i'd be perfectly happy with 4.5 to 5% return on that amount (4% would be about equal to what i'm getting now but without the headaches of managing the properties)

i'd be content with that rate of return. (i'm probably more in wealth preservation mode vs wealth accumulation). i also don't mind the idea of DST being an illiquid investment since i still have a healthy brokerage account, a 401K when i turn 59.5, no debts and a 250K line of credit that i can tap into if i run into any emergencies. i don't have a lavish lifestyle (traveling is my biggest expense and i'm still a bargain shopper at that) and i really don't have to leave an inheritance to anyone since i'm single and no kids. lastly, i can also return to my healthcare job if need be or if i get too bored. (i plan on keeping my healthcare license)

i would then use 2023 to see how the DSTs perform. if they do well or as predicted, i will start my sabbatical 2024, if they don't do well, i would work an extra year or two. i would also consider exiting a DST when they mature if they're not to my liking since my tax bracket would be lower in 7-8 years when DSTs normally mature. but unless interest rates change dramatically i can't think of anything that's passive and get's me 5%.

i understand that there are risks in DST just like any other real estate investment. technically i could take a 30% hit (since that would have been my capital gains / depreciation recapture anyways)

i'm actually a little sad with the idea of selling my properties. they were my weekend and free time projects for the last ten years or so.

if you've made it this far, thanks for reading!

i guess my questions are:
a) am i thinking clearly on my assumptions? is this a good game plan? should i take the sabbatical / retirement plunge?

b) are there better investment options out there?

c) if you were in my situation would you do anything differently?

d) for people with DST experience, any other sponsors you've had good experiences with? i've heard good things about Passco and Cantor.

e) i'm leaning toward using Archer Investors as the qualified intermediary but any other references would be appreciated

f) any advice is welcome. i thought this would be a good place to ask since we're all real estate investors and have that mindset of using real estate to build wealth and fund our retirements.

thanks!

How did your accountant come to that ROI? Does the Cash Flow from your properties pay your living expenses? A good idea would be to compare three scenarios from a pure numbers perspective :

  1. 1. Keep the properties and hire a p.m. , 
  2. 2. 1031 exchange into DST,
  3. 3. Sell and invest in ETFs, and 
  4. 4. Combine it into the NNN.

The third scenario is good for adding in another perspective and opportunity cost. After you determine the numbers, then think about which one would make your life better. Sometimes it's not always the best financial decision that wins, but the one that makes your life easier, happier, and more fulfilling.

I think the sell decision might be more based on if you still want to be an active investor in retirement or would you prefer to be more passive - if it's passive then there are options beyond the DST and 1031. I sold almost all of my active properties and deferred/avoided the capital gains taxes by doing what my accountant calls a "Lazy 1031". Instead of trading up into new properties or being locked into a DST, I invested the proceeds in multiple real estate syndications. I diversified by operator, asset class and market and used the cost segregations and bonus depreciation to offset all of the gains from the sale of my active real estate. I will have to recapture the depreciation when the assets sell, but I can invest in new syndications and repeat the process. I wanted to become a full time passive investor anyway, so this fit nicely with my goals and objectives.

I think one of the most important things to think about when making these decisions is if the investment strategy will match your lifestyle - if you really want to retire and not think about your finances, perhaps the DST will work best for you. If you want flexibility and are willing to put in a little bit of time to learn how to invest in passive syndications, then maybe the Lazy 1031 will work for you.

The retirement decision is one that only you can make - but taking steps now to set yourself up to retire in a few years is prudent because you can always change your mind and keep working, you can't change your mind and go back in time to prepare yourself financially for retirement!

Originally posted by @Dennis L. :

i guess my questions are:
d) for people with DST experience, any other sponsors you've had good experiences with? i've heard good things about Passco and Cantor.
e) i'm leaning toward using Archer Investors as the qualified intermediary but any other references would be appreciated

Hi Dennis, thanks for the mention of our firm. As you know we conduct weekly and monthly webinars with these Sponsors and work closely with them, they have great people working for them. For those viewing this thread, I do want to point out that we are not Qualified Intermediaries, we are Registered Reps.

Updated 29 days ago

Hi Dennis, thanks for the mention of our firm. As you know we conduct weekly and monthly webinars with these Sponsors and work closely with them, they have great people working for them. For those viewing this thread, I do want to point out that we are not Qualified Intermediaries, we are Registered Reps.

@Chad Duncan thanks for the reply.  i'm only netting about 110K on on my units.  in order for me to hire a property manager, i'd have to increase rents but i'm also concerned about any big ticket items.  i had to replace a water line and that was 5K down the drain.  i think what will make me happier in the end is not having to deal with tenant calls.  i don't mind them when i'm around but i've gotten them when i'm on vacation and i don't blame the tenants but it's just a hassle.  

@Jim Pfeifer thanks, i've never heard of syndications. i'll have to look into it more. may i ask what type of ROI are you getting using this method?

@Leslie Pappas u oops, sorry.  this is all new to me.  what's the difference between qualified intermediary vs investment advisors?

@Dennis L. Having a good property manager is worth it in most circumstances. As for big ticket items, you can get a general contractor or inspector to see what's going to be needing replacement for the next 10 years and save for them. That would most likely lower your stress when those come due.

@Dennis L. Returns in syndications vary wildly depending on the operator, the market and the asset class but generally the cash on cash is 6%-10% and the average annual return can be anywhere from 6% to 15%.  Most of the multifamily syndications seem to be around 7% cash on cash and 15% average annual return in the pro forma but in the last few years actual results have been better than that.  

You are describing my situation almost exactly. Along with DST's/NNN/property manager, I am looking to invest 1031 into a condo/tel in St Thomas. They will rent it out and run it for you. Look into Point Pleasant or many others. The returns seem a little low on these if there is vacancy and there are large HOA fees because of the insurance to cover hurricanes, but it's a vacation spot for yourself and maybe it can shift into personal use over the upcoming years, at least that's my hopeful thought. I like to think of it as, some of my tenants have been hurricanes (PITAs), so why not turn one of the rental properties into something that literally could be taken out by a hurricane? LOL

Originally posted by @Dennis L. :

@Leslie Pappasu oops, sorry.  this is all new to me.  what's the difference between qualified intermediary vs investment advisors?

No worries, Dennis, happy to help.

A qualified intermediary is who you're looking for to administer your 1031 exchange. They must be an unrelated 3rd party whose only role is the administration of your 1031 exchange. They document and transfer the funds from closing to closing so you do not have receipt of the funds. The 1031 and intermediary must be in place prior to the closing of your sale.

Our role as registered reps is to consult with investors who buy and sell investment properties of any scale. We help real estate investors re-invest their 1031 Exchange proceeds into an investment product called a DST. It stands for Delaware Statutory Trust and is a trust/pass through entity in which a sponsor (think big real estate investment corporation) buys institutional property (apartments, self storage, commercial, medical office, etc) and then sells interest in the Trust/Property to investors. We have assisted hundreds of investors in 1031 Exchange, and developing their own "hands-off" diversified portfolio of institutional real estate.

Can read more on my blog here on BP

https://www.biggerpockets.com/...

@Mark H. Porter , Great question. ROI truly just measures opportunity cost of dead equity. As I get later in a market and cap rates (and as a consequence ROI) gets compressed I start to temper my expectations. And for me the best way to do that is to look at the cash on cash return. As long as I'm not over leveraged. Or as long as I've got non-recourse financing I can think of the cash as the investment - no other potential risk and no other potential reward. So Cash on Cash becomes my actual ROI metric. And as long as I can get a decent cash on cash ROI then I'm in a good holding pattern until the market turns and I can once again buy high caps and compress them myself.

But that's just me. And it's one of the things about DST investing that always makes me tread cautiously. DST's typically pay return only on cash invested. So unless you're buying what they're saying about appreciation and exit or you're thinking of the DST as a place to park debt and convert it to non-recourse, you are best served thinking of the DST as a cash on cash return.

As long as I'm happy with the cash on cash return I think of that as my stress test ROI and it serves me well. I'm never negatively surprised. And many times there's a bonus at the end.

I've found it's very easy for me to play mind games with myself - as long as they're under 6 years of age games !

There are already a ton of good suggestions so I'll refrain from repeating what has already been suggested. But the first thing that jumps off the page when I read your original post, is that your ROI is LOWER than 10 years ago, and that it sounds like you have done minimal rent increases in that time?

I do not know your specific market, but Id strongly suggest you speak with a local property manager that can help you asses what market rents should be with your properties, both in current condition, and also with renovation plans put in place. My properties rent prices have doubled in the past decade, so its hard to imagine lower ROI on those properties, if at market rent. Having a good understanding of how your current properties should/could be performing if income is maximized, will help you decide what is the best use of your time/money.

Hope that is help. Best of luck! 

sorry, didn't have cell coverage for a few days and just catching up.  thanks for everyone's input so far.

@Jim Pfeifer i apologize for such a basic question but who do i talk to to get access to these syndications?

@Amit M. thanks for the link!  very informative.

@Mark H. Porter thanks for the referrals. i guess the way i was calculating ROI was how much the properties were worth and how much money i was netting. so even though i raised rents the properties are worth so much more now than 10 years ago so my ROI isn't as good as it was when i first started. not sure if that's the correct way at looking at it.

@Benjamin Magnie yes, you are correct.  i could/should raise rents and get them up to market but i'm also at a point where i don't want to answer calls to fix things or be responsible for any major repairs anymore.  thankfully i haven't had many but i also don't enjoy dealing with bad tenants.  

@Dennis L.

Hi Dennis, yeah, I think you’re using this incorrectly.  A Return on Investment calculation should be a snapshot taken on the beginning of the investment to compare it to others.  It subtracts the beginning value from the final value 

Say you paid $500k for a property and sold it for $1M. You'd make $500k on the deal and the ROI would be $500k (net return)/$500k (initial investment) = 1 * 100 = 100% return in investment.

One major problem with this is it doesn’t care how long it took to get that return.  It’s a big difference if it took you 20 years compared to five.

What you’re looking at is Return on Assets - the ratio of net income on the value of the asset held.  To increase this, you either increase the net income or devalue the asset.  The decision is either increase rents (or decrease expenses) to increase net income or sell the asset and instead buy an asset that will generate a greater return.

My advice to you? As you are not even 50 I would not be satisfied with a 4.5 - 5.0% return of a DST. You should think more towards increasing your cash flow rather than being satisfied with a return you will live with for 7-10 years (normal DST duration).

@Dennis L.  I totally get it Dennis. I was a landlord of 200 units, self-managed, for 15 years, before deciding I wanted a change. My main point is that regardless of what you decide, knowing what market rents are will help you properly value your buildings, for purposes of selling it, or even keeping it and putting a property manager in place. You might be surprised to find that your rents could be raised enough to afford a property manager AND increase your cashflow at the same time. 

As an agent, I am constantly looking for self-managed properties where rents are low. These are the best deals for my clients. Often the seller doesn't understand the value of his buildings because they are thinking with the wrong rent/income information. My buyers benefit from this. 

You don't want to sell your buildings in this condition, where the person buying it is getting an amazing deal because you didn't maximize your income or even understand the value, before listing the property. If you are going to sell, make sure you do everything you can to get top dollar. You've worked hard for years and have earned it!

@Dennis L.

There are a lot of syndicators to sift through, I always recommend you get referrals from your network and then call and talk to different operators so you can find someone who you are comfortable with and meets your needs.  I would he happy to share some groups and communities with you who help with education and networking around syndication investing.  PM me if you are interested!

Completely agree with @Benjamin Magnie .

I’m Not sure how you valued the present value of your assets without increased rents.  Most buyers will be looking at the Net Income as part of the valuation decision.  With low income you Will have depressed valuations.   

Originally posted by @Mark H. Porter :

@Dennis L.

Hi Dennis, yeah, I think you’re using this incorrectly.  A Return on Investment calculation should be a snapshot taken on the beginning of the investment to compare it to others.  It subtracts the beginning value from the final value 

Say you paid $500k for a property and sold it for $1M. You'd make $500k on the deal and the ROI would be $500k (net return)/$500k (initial investment) = 1 * 100 = 100% return in investment.

One major problem with this is it doesn’t care how long it took to get that return.  It’s a big difference if it took you 20 years compared to five.

What you’re looking at is Return on Assets - the ratio of net income on the value of the asset held.  To increase this, you either increase the net income or devalue the asset.  The decision is either increase rents (or decrease expenses) to increase net income or sell the asset and instead buy an asset that will generate a greater return.

My advice to you? As you are not even 50 I would not be satisfied with a 4.5 - 5.0% return of a DST. You should think more towards increasing your cash flow rather than being satisfied with a return you will live with for 7-10 years (normal DST duration).

 I was thinking ROE (Return on Equity) is a better measure of how your trapped equity is performing. ROA includes debt in the asset value, so selling the asset will only releases part of the value. Without debt, ROE is the same as ROA so wouldn't matter in this case. 

@Joe Splitrock , you’re correct, I didn’t consider that explanation.

@Dennis L. - it's really quite common for people to use terms incorrectly (I know i have!). One notorious one is in the calculation of Net Operating Income (operating income minus operating expenses). Note that set-asides for capital expenses and your debt service are not part of operating expenses . Therefore, they are subtracted from the NOI, not before it. I've seen a number of accusations be tossed between seller/buyer when their not talking the same language.