1031 Exchanges/ DST?

Question

I have noticed a lot of ads being pitched about getting out of hassles of being a landlord and becoming a more “passive“ investor through the use of 1031 exchange and DST‘s. They are claiming they can get from 9 to 14% returns. Of course, they want you to listen to their 13 minute pitch. And to give them all your information in order to receive this informational pitch. Does anyone have any experience with these things? What has been that experience? I am very skeptical. But would love to find something more passive￼

Sherry Byrne · Answer

@Sean Ross thank you. I had already heard most of those pros and cons. And I, too, believe the stated returns were suspiciously high. I guess I am just a skeptic. When I asked exactly what were the investments, I was told Real Estate. I asked what kind of Real Estate, he said commercial. But I know that brick and mortar real estate for both Office and commercial use is on the decline. The second thing he mentioned was short term rentals. Again, there is a lot of legislation trying to limit or ban them completely. Sorry I wasn’t very thrilled about either of those mentions.

Sean Ross · Answer

@Sherry Byrne a lot of people are in your shoes right now (moving from active to passive, that is) and DSTs have been a popular choice since their inception.

It's a legitimate investment option.  It's not a panacea of course. If you're working with a 1031 company, enlist their help to make sure you're considering the important variables..

Many of our past and current clients have/are invested in Delaware Statutory Trusts.  Here are a few observations and notes:

• 9% to 14% seems rich to me. You're much more likely to get a passive cash-on-cash yield closer to 4-7%
• similar in some respects to a REIT (real estate investment trust), except that you as beneficiary of the DST are not receiving ownership shares like a REIT investor. 
• There are many good DST sponsors; there are some not-so-good sponsors.  You should consider their track record, particularly whether they've actually taken an investment "full-cycle" and proven they can exit and take care of their investors. Fees can also be steep here. 
• DSTs tend to be illiquid
• DSTs tend to rely on leverage to create their returns.  This isn't bad in any ex ante sense, but it's a risk to consider. 
• You have no management responsibilities and you receive passive income.
• Unlike TIC investments, you don't have the risk of relying on multiple borrowers when there is debt involved. 
• There are other passive options of course.
•

I hope this helps.  You can DM me if you have specific questions and I'm happy to help out.

Joe Sera · Answer

@Robert Casper the costs/fees vary depending on the individual offering.

Some are as low as 1.00% and it's also not uncommon for the total costs to be well above 11% in others. Keep in mind, there are additional costs beyond just commissions/BD fees to be aware of.

I'd be happy to walk through a PPM with you and get into more granular details.

Robert Casper · Answer

I have been trying to understand the Delaware Statutory Trust (DST) for a few months because it is 1031 eligible. I am troubled by the following at the moment.

1. I have been getting told by Registered Advisors(RA)/Registered Reps(RR) working under Broker Dealers (BD), the up front cost to buy into a DST runs 5-6% total for the joint BD&RA/RRas as specified in the PPM. I have been told the DST pays it and of course it gets factored into the DST cost and there is no other cost.Then along comes another RA/RR/BD and it says the cost is 7-11% and anyone telling me the cost is 5-6% is not telling the truth. What do you guys say?

2. Can anyone step to the plate and name the leading Broker Dealers in the DST space.

My exchange clock is ticking, so your insight would be greatly appreciated.

Robert C

Sherry Byrne · Answer

@Sean Ross that sounds good! Maybe I will contact you for more info! Thank you!

Sean Ross · Answer

Yes @Sherry Byrne I think being skeptical with any investment is a pre-requisite. We've all read the horror stories of folks losing their shirt when someone shady/incompetent leads them down a bad road.

The red flags you highlight would be flags for me as well.

Any good DST sponsor would be able to tell you right away what assets they still open for capital investment, they'd give you a PPM so you can review the facts and figures yourself, etc.  In no time at all you'd be able to say "Oh, here is an Amazon Warehouse that I can invest in at an estimated 5% return," or "this is a lovely office building in Austin that was able to collect 98% of rents during COVID"...etc.

Without these details I think I would listen to that internal voice you have going there.

1031 Exchanges/ DST?

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