What are the pros and cons of 1031 exchanging into a DST?

What are the pros and cons of 1031 exchanging into a DST?

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

I like the idea of no longer having to be hands on with tenants and toilets. But what are the risks and the cons?

I see a lot of nomenclature from companies about estimated 7 or 11% return for their DST, plus you'd get appreciation, etc. But

1) What is the typical total return on a DST?

2) How long is the money tied up? 

3) What are the risks? 

4) How do I screen DST's?

While I would like to get out of dealing with tenants and toilets, I don't want to throw the baby out with the bathwater...

0Reply
31 views

1 Reply

Jump to latestLatest
  • Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes
    3y

    Hi Jack. Here are some answers to your questions that I hope can help.

    1) Typical returns are 5-6%. If you see advertised returns of 7-11%, RUN!

    2) 5-7 years is the normal hold time. There are other DSTs that have 2-3 year hold times however after the 2 or 3 year year mark, a REIT buys the property, and the investors get shares of the REIT. You can sell those shares at any time but you can't exchange out of them like a typical DST.

    3) Sponsor risk and Real Estate Risk are the big ones. Many sponsors may not have the track record to buy an institutional piece of property and place it in a DST. Real estate risk can be potentially mitigated through reputable sponsors who have strong track records as well as going into a diversified portfolio of DSTs.

    3) You want to work with a DST broker who has a background in real estate. Many financial advisors, especially as of late, have started going into the DST space and selling DSTs to their client. The issue with that is the advisor doesn't understand the real estate aspect. They don't know much about the asset class, the market, or how the DST world functions! Funny enough, I've heard a story from my colleague about how he had a colleague at his previous firm who wanted to present a DST to their wealth management client. The previous firm was a big wire house that didn't specialize in DSTs or even alternative investments. His colleague goes into the meeting to present and comes out asking what a cap rate is.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.