DST(Delaware Statutory Trust )
Georgetown, TX · Member since 2014 · 12 posts · 9 votes
DST(Delaware Statutory Trust )
Most Popular Reply
Member since 2019 · 3 posts · 13 votes
6yWe bought into DST-s this year as part of 1031 exchanges. I liked the process and I am hopeful that this will work out long term. Ask me in 10 years! I am a mathematician with actuarial background and I do not mind reading the 250+ page private placement memoranda documents. I got lucky that I found a financial advisor who is a fiduciary. He was available for lots of conversations and helped our selections. We are diversified across geography and sponsors. We considered commercial and storage sector but ultimately we stuck to multifamily.
We invested in 2 multifamily deals using partnerships prior to going to the DST route. One of the multifamily deals was a great success in 1.5 years (originally planned for 4-5) the other is still ongoing in its 2nd year and it is performing somewhat below plan/expectation (but no a major concern).
Initially, we wanted to 1031 into another such multifamily deal, but I quickly learned that is a no-go, because partnership interest is 'not like' real estate ownership. With the 45 day deadline coming up I gave myself a crash course on DST-s and invested with Inland.
Then, shortly after a second single family home had a similar issue: the tenants separated and we let them out of the lease early. Considering that the 10/1 ARM mortgage on it with the ultra low 2.5% interest rate was in its last year, we decided to 1031 this as well into DST-s.
Here are the pros and cons as a I see them:
PROS:
* Quick closing (3-5 days!)
* Better diversification can be achieved (with little work). (A single family home can suffer one bad tenant incident which could tank your returns. Harder to own in multiple markets.)
* Completely passive investment. No calls regarding broken water heater. No need to deal with dog chewing up the place etc. No hassle over finding tenants.
* Simpler record keeping. DST sends replacement 1099 at end of year. No need for you to keep track of handyman, legal, travel, etc. expenses. No need to send 1099-s to contractors.
CONS:
* Intimidating PPM documents. Some may never get comfortable reading these. I found in one a disclosure stating that a broker who was selling shares has been convicted a few years prior for operating a ponzi scheme. I can totally see that after reading that some investors just run the other way.
* While record keeping is simpler for operating expenses, depreciation must be tracked by investor and can be a challenge to some. (I intend to tackle this myself, because I do not trust others with my money, but if I have to, I will hire an accountant to help.)
* You need to file state tax return in each state you own that has state tax!! (This is what makes Florida, Texas etc. favorite locations for DST-s.) Make sure you have your taxes very much in order prior to doing this, because refiling taxes in multiple states will be a pain.
* You probably can get better return with other multifamily investments that focus on improvements and value-add. DST-s cannot make significant improvements to the property (per the IRS private letter ruling). DST-s will never offer an investment to buy land and build on it and sell for example. Of course, new appliances and carpet, wood floor, countertop is allowed. (This is my understanding.)
* DST-s are new and not well tested in (tax) court. Lot's of other risks, see the PPM where they discuss these risks over several pages. DST-s started in 2009 and so they did not live through a proper recession. However, the companies sponsoring them (some of them that is) were in real estate before and that can give some guidance. I will post a separate message regarding risks.
* Illiquid investment. You have no control over timing of the sale. You better not need the money. (This is almost the same for a partnership interest in a multifamily property.) There is a secondary market, but it is very recent and untested.
* One has to be an accredited investor (1M assets without primary residence or 300k+ income.) However, note that this is not actually verified. At the same time, I totally agree with the accreditation requirement.
Finally, I thought first that the broker fees/commissions are crazy high for DST-s. These are around 8.75-9.5%! I always thought that 6% real estate commission is too high, especially true for the Bay Area. (Should be capped by a small multiple of the amount of real estate taxes, which is 1% in CA but 2.5-3% in Texas for example. That would take care of the problem!)
But then I realized that the 9% commission is only on the funds invested. When you buy a single family home with a loan, you pay commission on the loan amount you take on! Advice: do not pay full commission for getting DST-s. It is negotiable.
64 Replies
- Financial Advisor · Manchester, NH · Member since 2017 · 97 posts · 68 votes7y
@Michael Beur More sponsors are bringing DSTs to market than ever. Plenty of opportunitues exist, but I always look at Quality of sponsor, tenant, and property.
- Ridgefield, CT · Member since 2017 · 101 posts · 60 votes7y
@Michael Beur I am considering selling my SFR....and would love to hear your feedback/ research regarding DSTs...
love to hear your feedback.
- Charleston, SC · Member since 2013 · 380 posts · 157 votes7y
@Michael Beur I too am just starting to look at DST's as well. Like @Andrew Frishman, I would like to hear what you've learned and your opinion on them.
Thanks!
- Member since 2019 · 1 post · 0 votes7y
My father is considering doing a 1031 exchange into a DST and I trying to help him choose which company to use. Are there any key questions I should be asking to help decide the best option for him?
Thanks!
- 7yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Michael Beur, @Andrew Frishman, @Nina Arroyo, and hey there @John Semanchuk, It's no coincidence that so many folk are looking the same direction to move into more passive realms. I must confess I was in the same camp of@Tony Kim, but lately as @Kyle Kadish said, there is a new breed of DST that is exhibiting lower fees and higher IRRs based on exit strategy.
It really is interesting to stack up a DST with an honest exit with a typical syndication fee for fee. The DST doesn't come off that badly. But you do have to look beyond the guaranteed interest rate and recognize that the best DSTs are not speculative but are appreciation dependent. Which means that you may or may not have to wait a bit longer to get the back end cash out and "results may vary" :)
The 1031 Investor5137 Reviews - London · Member since 2019 · 722 posts · 386 votes7y
How long have DSTs been around?
- Rental Property Investor · Rochester MN · Member since 2018 · 64 posts · 106 votes7y
DSTs have been around since 2004 I believe.
- Georgetown, TX · Member since 2014 · 12 posts · 9 votes7y
I Have started working with Passco, BlueRock, RK, Nextpoint, Cantor Fitzgarald and NB Capital
They all specializing in Apartments, with the exception of NB Capital, Specializes in Student Housing. They all have been in DST Business for long while with the Exception of Cantor Fitzgarald. However, they have been in Real estate for ever and are the biggest player.
Any comment from anyone regarding any of these Sponsors? Has anyone else doing or have worked with them before?
Michael
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Nikhil Nirmel:
I just wanted to mention that my new home equity crowdfunding startup will use DSTs as investment vehicles that each effectively purchase units of individual properties' equities. I don't yet have a legal opinion on whether these investments can qualify for 1031 exchanges.
One thing I learned about DSTs is that they need a trustee who is physically located in Delaware. There are some companies like CSC you can hire, but I was quoted $2k/year/trust which was far too expensive for my purposes. I'm not sure what most people do to fulfill this requirement, but my personal plan is to actually move to Delaware to fulfill the role myself.
I would also note that there is a thing called a Series DST, which allow you to pay the $500 fee once and then create arbitrarily many "child" DSTs that distinct owners and distinct liabilities. This could save money if you're creating a lot of trusts.
Interesting point about the DST Trustee requirement. It sort of sounds like something DE would do.
I will ask a DE real estate attorney I know. She can research the topic a bit.
- London · Member since 2019 · 722 posts · 386 votes7y
Nikhil,
What could you afford your business model if $2K is too high? How price sensitive is the model?
Will the customers for the business accept you are both the platform and the trustee? Or, will that concentrate the risks so you get weak take-up?
- Investor · united states of america · Member since 2018 · 31 posts · 5 votes7y
It depends on how small investments we want to support. If we want to support small home equity loans, worth $50k-$150k each, as is the plan, and our commission is something like 5-6%, then we have just single-digit thousands to work with as revenue. Given that each investment can span 10 years, $2k/year wouldn't ever work. If we were doing large commercial deals worth millions, $2k/year would be fine. The trustee has legal obligations to the trustors, so I believe investors should trust that we'll fulfill those obligations as trustee without conflict.
- London · Member since 2019 · 722 posts · 386 votes7y
Originally posted by @Nikhil Nirmel:
It depends on how small investments we want to support. If we want to support small home equity loans, worth $50k-$150k each, as is the plan, and our commission is something like 5-6%, then we have just single-digit thousands to work with as revenue. Given that each investment can span 10 years, $2k/year wouldn't ever work. If we were doing large commercial deals worth millions, $2k/year would be fine. The trustee has legal obligations to the trustors, so I believe investors should trust that we'll fulfill those obligations as trustee without conflict.
Tangent warning.
As you are depending on the structure never being classified as a loan, do not call it a loan in any discussions. Leaving evidence which Google can find will work against you in a court. These are not home equity loans based on what you shared in the other thread.
- Realtor · Aventura, FL · Member since 2019 · 2 posts · 1 vote7y
My original post was removed, but I can shed some light on DSTs and their sponsors.
First and foremost, the reputation and history of the sponsor should be a main concern. Only work with the best and experienced as these are long term investments. Secondly, choose the right DST portfolio or diversify between portfolios. Some will be longer holds, different yields, and LTV than others. The interest rates are net figures so they're easily comparable to other investments and each other, but the holding periods are undefined and are only "targets".. so be mindful of that. DST portfolios are always opening and closing so be sure to get current information on existing portfolios and their availability. As with any investment there are pro's and con's.. balance them out and make the right decision for yourself. DSTs are a very flexible tool in a 1031 exchange.
- 6yPaul MoorePro MemberCommercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
@Michael Beur Have you heard about the Deferred Sales Trust? It's another method for deferring taxes upon sales of assets. There are fees, so you need to do the math to see if it makes sense for you. It can be very powerful if the sale amount is high enough. We don't handle Deferred Sales Trusts but we know a few groups who do. Feel free to message me if you would like contact info.
- Member since 2019 · 3 posts · 13 votes6y
We bought into DST-s this year as part of 1031 exchanges. I liked the process and I am hopeful that this will work out long term. Ask me in 10 years! I am a mathematician with actuarial background and I do not mind reading the 250+ page private placement memoranda documents. I got lucky that I found a financial advisor who is a fiduciary. He was available for lots of conversations and helped our selections. We are diversified across geography and sponsors. We considered commercial and storage sector but ultimately we stuck to multifamily.
We invested in 2 multifamily deals using partnerships prior to going to the DST route. One of the multifamily deals was a great success in 1.5 years (originally planned for 4-5) the other is still ongoing in its 2nd year and it is performing somewhat below plan/expectation (but no a major concern).
Initially, we wanted to 1031 into another such multifamily deal, but I quickly learned that is a no-go, because partnership interest is 'not like' real estate ownership. With the 45 day deadline coming up I gave myself a crash course on DST-s and invested with Inland.
Then, shortly after a second single family home had a similar issue: the tenants separated and we let them out of the lease early. Considering that the 10/1 ARM mortgage on it with the ultra low 2.5% interest rate was in its last year, we decided to 1031 this as well into DST-s.
Here are the pros and cons as a I see them:
PROS:
* Quick closing (3-5 days!)
* Better diversification can be achieved (with little work). (A single family home can suffer one bad tenant incident which could tank your returns. Harder to own in multiple markets.)
* Completely passive investment. No calls regarding broken water heater. No need to deal with dog chewing up the place etc. No hassle over finding tenants.
* Simpler record keeping. DST sends replacement 1099 at end of year. No need for you to keep track of handyman, legal, travel, etc. expenses. No need to send 1099-s to contractors.
CONS:
* Intimidating PPM documents. Some may never get comfortable reading these. I found in one a disclosure stating that a broker who was selling shares has been convicted a few years prior for operating a ponzi scheme. I can totally see that after reading that some investors just run the other way.
* While record keeping is simpler for operating expenses, depreciation must be tracked by investor and can be a challenge to some. (I intend to tackle this myself, because I do not trust others with my money, but if I have to, I will hire an accountant to help.)
* You need to file state tax return in each state you own that has state tax!! (This is what makes Florida, Texas etc. favorite locations for DST-s.) Make sure you have your taxes very much in order prior to doing this, because refiling taxes in multiple states will be a pain.
* You probably can get better return with other multifamily investments that focus on improvements and value-add. DST-s cannot make significant improvements to the property (per the IRS private letter ruling). DST-s will never offer an investment to buy land and build on it and sell for example. Of course, new appliances and carpet, wood floor, countertop is allowed. (This is my understanding.)
* DST-s are new and not well tested in (tax) court. Lot's of other risks, see the PPM where they discuss these risks over several pages. DST-s started in 2009 and so they did not live through a proper recession. However, the companies sponsoring them (some of them that is) were in real estate before and that can give some guidance. I will post a separate message regarding risks.
* Illiquid investment. You have no control over timing of the sale. You better not need the money. (This is almost the same for a partnership interest in a multifamily property.) There is a secondary market, but it is very recent and untested.
* One has to be an accredited investor (1M assets without primary residence or 300k+ income.) However, note that this is not actually verified. At the same time, I totally agree with the accreditation requirement.
Finally, I thought first that the broker fees/commissions are crazy high for DST-s. These are around 8.75-9.5%! I always thought that 6% real estate commission is too high, especially true for the Bay Area. (Should be capped by a small multiple of the amount of real estate taxes, which is 1% in CA but 2.5-3% in Texas for example. That would take care of the problem!)
But then I realized that the 9% commission is only on the funds invested. When you buy a single family home with a loan, you pay commission on the loan amount you take on! Advice: do not pay full commission for getting DST-s. It is negotiable.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes6y
So what kind of investments do most DST's engage in? I'm hearing a few different descriptions above. My understanding is that the DST is limited compared to conventional sponsors in that they cannot raise added funds, refi loans, etc. So if it's too risky for them to pursue value add properties, are they mostly doing stabilized buy and holds, and their main upside is perhaps improved management and natural appreciation/market rent increases? If so that puts a lid on DST's general upside potential, and somewhat defeats the purpose of paying for professional management if the value add component is missing (of course you're still getting the 1031 exchange benefit and passive investment aspects.)
Maybe those with more hands on experience with various DST's can speak to this matter? Thanks
- Professional · Lake Forest, CA · Member since 2017 · 10 posts · 5 votes6y
@Michael Beur Michael it's a pleasure meeting you. The answer is yes we arguely have the largest inventory of DST's in the country. We currently have 35 of them available.
To date we have had nothing but a positive experience with all our clients and with all the sponsor we have represented.
I hope this helps!
- Professional · Lake Forest, CA · Member since 2017 · 10 posts · 5 votes6y
@John Corey since 2004
- Financial Advisor · Los Angeles · Member since 2020 · 53 posts · 19 votes6y
@michael- Did you end up going the DST route?
- Investor · Los Angeles, CA · Member since 2016 · 89 posts · 73 votes6y
@Michael Beur, would be very interested to hear if you ended up going for it and what is your experience like. It's very surprising to me how little discussion there is here about DSTs. And reading a few posts, it seems like most replies tend to be from an external perspective and not from actual experience. The only educational and instructive reply was from @Matyas A. S.. You can buy into DST without doing a 1031 exchange. It is not mandatory. Meaning it could be a standard investment vehicle for anyone who qualifies. That is what I was considering. It seems like most replies point that among some of the cons are the fees, the fact it's an illiquid investment and returns at around 5-6%. I don't see these as actual cons. In my opinion (and for clarity, I do NOT own, nor have I ever owned any DSTs), the fees are what you pay for not actively handling the headaches of real estate management issues yourself, which at some point becomes almost priceless; the illiquidity is inherent to real estate in general, esp in the commercial space, and in reality no one should get into DST with money they would need in the next 5-10 years (ideally never need it and just invest it for the yield); and the returns are sort of on par with various real estate investments, as well as non-RE investments, such as dividend stock/funds, other PPMs and other passive investments. In my humble opinion, DST is what you do when you either want to 1031 into a passive vehicle and get out of active management (whether you use a property manager or not) or when you have excess money and you want to diversify. I'm sure there are better investment vehicles than DST, but from all I've seen it doesn't strike me as a negative whatsoever, and can be a great way for smaller investors to get involved in bigger deals.
- Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes6y
About DSTs in general:
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 the return they advertise 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.
- Georgetown, TX · Member since 2014 · 12 posts · 9 votes6y
@Guy Azta.. Yes Guy
I did invest in few DST's around the country and different sponsors, all in multi families with the an exception of one in Student housing. So far they all been paying the full amount during the COVID with the exception of the student housing which they stop last month and telling us they are going to start paying again soon.
Will see.
If you want to know more detail, you can send me a direct e-mail with your phone number and we can chat about it
Have a great weekend.
- Investor · Los Angeles, CA · Member since 2016 · 89 posts · 73 votes6y
@Michael Beur that's great. Glad to hear most of your DSTs have been paying. The student housing is understandable. Good thing you're diversified into several. Will reach out to you directly. Have a great weekend yourself
- Investor · Los Angeles, CA · Member since 2016 · 89 posts · 73 votes6y
Hello @Steve Morris, while this is not my thread (it's @Michael Beur) I saw you replied after mine. If you don't mind, could you clarify some of your points a bit further?
1. It seems like there are 2 type of DSTs solicitors - the first ones are as you mentioned, various type of brokers / financial advisers, that may have 1 or 2 deals; and then you have companies like Kay Properties, that seems like that's all they do, and have a large roster of them. They may be more known here in CA. Have you heard of them?
2. I'm using Kay as an example. Had a few chats with them and I don't think you can overly rely on their internal staff. Obviously they want you to subscribe. You have to assess the actual deal and risks yourself and check the sponsor and operators, as you indicated
3. I was totally under the understanding that you buy into the underlying property. The way you wrote it, it may be interpreted as either that you're buying (1) the strength of the lease; or that (2) you're not buying the property, but buying into a master lease. Be great if you could clarify
4. No question here - ;) that goes for pretty much nearly anyone you give your money to
5. 100% agreed. Granted, not sure how many people here have that $1M sitting and collecting dust, but the same logic would apply even on a $100k amount.
6. I did read about this. It's similar to PPMs as far as I know. Once you're subscribed, you can only sell to already existing members. It's completely logical too. But again, investing in a large real estate complex is not a very liquid investment (if you meet someone who thinks otherwise, please tell them I have a bridge to sell). Anyone invested in DSTs is an accredited and at least in theory should have money they do not need. The way I see it it's about building an income stream, with some appreciation potential as well down the line, but with a little bit more of an exclusive ownership and participation than a REIT, and of course much more targeted and a lot more ad hoc. Happy to hear your thoughts.
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