1031 Exchange - DST?

32 Replies

Hi - we're getting ready to "push the button" with Kay Properties on a 1031 finance purchase of a $100,000 offering. Still doing a little Due Diligence. This will be a first DST purchase for us, and the 3rd time involved with a 1031 exchange. Two questions come to mind: 1) does anyone have any experience with Kay Properties? If so - how did that go? 2) how are "assessments" handled w/ a DST? in other words, if the roof blows off a FedEx building, do they typically get a loan to replace it, or are the investors assessed? TIA!

Chris

I looked at them since I liked the concept. I couldn't justify the fairly substantial load charges. Just too much upfront loss of principal. If they could make these vehicles more transactionally efficient I might bite.

Thank you, Mike. Assessments, in the "condo world" cover items not insured. For example, if the roof was "under insured", or if the ground moved below the roof support (I learned recently that earth movement is not covered under some policies, such as those on the bluffs of Lake Michigan falling into the water). So - no more thoughts on DST's or Kay Properties?

Kay Properties are very good at marketing and put out great materials.  I have no experience personally investing with them.   As far as fees.  I personally took averaged them over the 7 to 10 year period.  I am also at a point in my life that I dont want the stress of managing my own properties any more.  Freedom was #1 on my priority list.  

Chris, good point, I guess that kind of damage could happen to anything I own. I diversified into 6 different DST's. Each does have rather large cash reserves. But they still wouldn't be big enough to cover a building on a water slide. ;) Keep diversified, and geo diversification by different areas of the country.

Hello @Chris Stratton , would love to know how it went for you and if you ended up going for it. I'm surprised there is so little info and replies regarding this. I assumed there would be a lot more. I'm still relatively young (early 40s) and own 10 properties, some are multifamily, and the thought of buying another one and dealing with the headaches of managing the property management and all other operational grievances that come along with it, really makes me consider getting into some DSTs at some point. I always thought the "worst" part of it were the relatively low returns, and I see why that is not very appealing to newer investors, but I definitely see it as a viable option for investors who already have exposure and are looking for something that is less hands-on. Also, I think you need to have an accredited investor status before you can invest, so that may explain why you don't have as many people talking about it. My assumption is that people who qualify probably have other options, like PPMs with groups they know, syndicators they know, private funds and other vehicles that may be more lucrative. Happy to hear your thoughts.

I'm just saying this about DSTs in general, however, I've talked with Kay and they seem alright:

1) Realize that the guy selling these is more stock broker than RE broker. DSTs are about as close as you can get to a REIT that qualifies for a 1031. He may not understand the details enough to tell you if it's good/bad real estate.

2) If your sales guy understands comm property and accounting - BONUS POINTS.  There are a few

3) If you're buying a DST, odds are you're buying a LEASE and it's cashflow. READ AND UNDERSTAND THE LEASE!!!! There is a major franchise that puts these together, writes their own lease (sale-leaseback deal) and surprise - Gives themselves rent holidays in later years in the lease.

4) Realize there the return they give you is NOT guaranteed, so better history of the syndicator better the odds you'll get it.

5) If you have the money, try to diversify and spread it around by prop type and location (ie make 10 buys of $100K vs. one buy of $1M)

6) It's commercial RE - You CANNOT turn around and sell it if you need the money now.  There may be a secondary market on shares or may have to offer your share first to co-investors - Ask about that process.

Hi Guy,

We did buy into a couple of units with a DST vendor (Kay Prop). Experience has been positive, and we've had excellent service from Kay Properties. One was a straight-up purchase, the other included a loan component. The "loan component" means, I believe, that on selling, my basis is higher, so to continue, I would have to buy another loan component DST or face some same-year tax consequence. The 'buy in' costs are high, no doubt. The checks have, so far, just kept rolling in. We had a very slight increase recently in the smaller of the two investments. Honestly, not sure I would go/do something else different if these ended. Chris

What are your buy-in costs? I just spoke with one DST broker (Realized 1031) and they said that most sponsors that they work with kind of add the loads to their total costs, so all of your investment is put to work, although at a possibly higher building cost.

@Chris Stratton It seems like you are satisfied with your two DST's. So, I'm curious why you are ambivalent about investing in more. What type of properties did you invest in and what kind of returns are you getting?

@Mike Jacobson What type of properties did you invest in and what kind of returns are you getting?

@Kevin Entner I purchased two separate complexes in Florida, Two separate complexes in Texas, One Storage facility in Texas. Two Sr. Housing in Washington. One hotel dst in Missouri. The a couple of non DST investments. I have posts you can search for in the forums that explains what I did in more detail. I hope it helps other people who are trying to make a decision. I won't know if my decisions will work out or not in the DC and AC world. I'm just really glad I am not running the daily operations.

Like others on here, I am surprised that there is not more knowledge about DSTs. They are a great vehicle in so many ways. I plan to post a blog on DSTs soon.  

I have been studying them and we are looking into ways to launch one direct to investors, without the loads and sales fees.

@Paul Moore

Interested in learning more about this subject as. Have a portfolio of homes I'm looking to cash out on and put into commercial or large multi.

Is there more research/books in this DST aspect but written by an experienced investor (not from marketing sell side) ?? I want to verify some of my assumptions. I very much agree that those who sell the DST is more like a stockbroker. Especially I want to know the full cycle track record.

one problem that I found with CRE using DST, while they have a lot of complexities the return is still low. Regular DST only produces 4-5% CoC, but my simple no-hassle realty mogul(and the like) or other REIT can produce 4-5% too by default, the best REIT return is 8%.

I'm still thinking if DST is the right approach.

Hi @Carlos Ptriawan . My firm did launch a no-load DST last Fall and we (almost) filled it up quickly. So I would be happy to speak to this with no sales motive involved. Feel free to reach out to me to discuss what we've learned.

More importantly, one of our investors has invested in a bunch of them and recently raised an issue that I was unaware of until recently. According to him, some of the DST operators/brokers work together to sell off DST assets much sooner than planned. They hope to move their investors into a similar deal with similar returns and keep their capital gains deferral going. This sounds fine until one realizes they are paying all of the front-end broker loads and operator acquisition fees all over again. If you do this every three years, you've paid all of this three times in a decade. As opposed to finding a DST operator who holds for ten years and paying those fees once. Think about how these fees cut into capital gains! DST Investors should add this possibility into your due diligence checklist.

Good thread and great comments by all (especially @Steve Morris).  

We need more education in this space. You have to have someone standing next to you doing due diligence. The "stock broker sales guy" won't work. DST is too complicated not to have due diligence as part of the service they are offering (plus the commission they make should warrant more help that you can rely on). Sponsor history is available in detail along with everything you could imagine to perform good due diligence on a deal.

Fees up front are an issue.   @Paul Moore and others have done a great job taking fees down in the product.  

Lower returns are an issue as well. This is more of a function of the asset purchased (class A multifamily is 60%/70% of the offerings) then the DST structure.

We see DST work for those that do not have the time or desire to continue managing property.

Hope this helps those of you that are exploring DST.

It seems from an investor that has few years of track record investing with DST, the combination of high sales load, commission plus the low performance of the DST provider; it seems either keeping the property, OZ or pay the tax is more viable options.