1031 Exchange - DST?

Tax, SDIRAs & Cost Segregation
7yFollow

1031 Exchange - DST?

Chris Stratton
Fort Myers, FL · Member since 2017 · 14 posts · 20 votes

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

10Reply
738 views

Most Popular Reply

Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
5y

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.

Podcast Guest on Show #533
7Reply
See this reply in the discussion

73 Replies

Jump to latestLatest
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Carlos Ptriawan to add to what you're saying, if an investor has a mix of properties (great ones and lesser ones) and they are looking to streamline, they could sell the less desirable ones, pay the gain taxes, and use the proceeds to pay down/off the loans on the most desirable properties they want to keep long term. If their interest rate is 4% on those, then they are "making" the equivalent rate of return (4%) as the DST scenario you outlined above. The big difference? zero risk, there is absolutely zero risk when you pay off existing debt :)

    3Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    5y

    Right Amit, this problem is actually a simple mathematic equition:
    one wants to swap a lesser performing rental with the more performing investment.

    The problem is since the performance is set by market, thus the problem is becoming:
    one wants to swap a less performing single/MF rental property in specific regional to a regional syndication economy that's more performing.

    In reality, these are difficult as the home price is rising and rent growth for SFR is higher than the growth of apartment/multifamily complexes esp. if it's class A property.

    Solution ? either payoff debt like you said or invest in other asset class that's perhaps more CF generating than apartment complex such self-storage/industrial or MHP. Even for this one there's a big maybe as regional asset class everywhere is experiencing cap rate compression as well inc. these two asset classes.

    0Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Carlos Ptriawan yes I agree. Especially these last few years with interest rates being so low for so long, every decent asset class has seen cap rate compression for several years. Which is why paying down debt seems especially compelling these days. 

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    5y

    Absolutely correct. 

    Yes been thinking a while about what to do after selling property:
    1. just pay the tax and paying off debt as you said
    2. 1031 DST with lower return "slightly higher risk" investment
    3. or QoZ funds where it's the riskiest investment/10 year money out with the investment into developmental phase/cycle location (hence lot of gambling) at the worst of time.

    It's win-win-win situation for uncle Sam :)

    2Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    5y

    I just read a track record of the full cycle history of some of the largest DST provider. So it seems 85% of investments overall are not losing money, while 15% investor is losing some sort of principals.

    1Reply
  • Albert Wright
    Rental Property Investor · Daytona Beach, FL · Member since 2014 · 14 posts · 19 votes
    5y

    I am in the process of closing a 1031 DST transaction with a "flat fee" broker. Instead of paying a percentage (load) of the total investment, they accept a reasonable fee for their services and credited the load back into my DST investment. I will be happy to share if anyone is interested.

    5Reply
    • Danielle S.
      Investor · Kenilworth, OH · Member since 2016 · 21 posts · 1 vote
      3w

      I'd be interested in hearing how this worked out for you five years later. I'm on track for a 1031 DST.

      0Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Carlos Ptriawan that’s interesting. Can you provide a link or reference?

    0Reply
  • Jack Martin
    Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
    5y

    @Carlos Ptriawan there are several challenges with owning MHPs in a DST, as would be the case with most multi-tenant real estate. That is the reason why you will see DSTs commonly invest in single tenant assets where a long term lease is in place with an extremely stable tenant. See restrictions of a DST below:

    Because a DST (the Trust) is a tax-driven structure, there are certain limitations imposed on what the Trust (and the trustee, the asset manager and the master tenant) can do. Specifically, under a properly structured Trust the following limitations will apply during the period that the property is held by the Trust: (i) the Trust cannot raise new capital; (ii) other than in the case of a tenant bankruptcy or insolvency, the Trust cannot renegotiate or modify an existing loan nor can the Trust refinance or enter into a new loan during the period that the property is held by the Trust; (iii) the Trust cannot renegotiate or modify its existing leases or enter into new leases other than in the case of a tenant bankruptcy or insolvency (in the case of a Trust that adopted a master lease structure, this limitation applies to the master lease and not the underlying third-party leases); (iv) the Trust cannot reinvest the proceeds from the sale of the property; (v) the Trust cannot modify or improve the property other than undertaking normal maintenance or minor non-structural repairs; (vi) the Trust cannot hold its reserves other than in cash or short-term obligations; and (viii) the Trust must distribute all of its cash, other than cash held for normal reserves, on a current basis.

    2Reply
  • Rick Kane
    Member since 2021 · 2 posts · 0 votes
    5y

    @Albert Wright can you please share a link?

    0Reply
  • Albert Wright
    Rental Property Investor · Daytona Beach, FL · Member since 2014 · 14 posts · 19 votes
    5y

    @Rick Kane Unfortunately, posting links and/or contact info is prohibited outside the "marketplace". 

    However, my flat fee DST purchase was a smooth experience, I saved $$$$s, and I would be happy to share if you pm me.

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    5y
    Originally posted by @Albert Wright:

    @Rick Kane Unfortunately, posting links and/or contact info is prohibited outside the "marketplace". 

    However, my flat fee DST purchase was a smooth experience, I saved $$$$s, and I would be happy to share if you pm me.

    Hi Albert. If the company you are using is not YOUR company, you can share links in the group. Website only, please no emails.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    2Reply
  • Albert Wright
    Rental Property Investor · Daytona Beach, FL · Member since 2014 · 14 posts · 19 votes
    5y

    Thanks for clarifying Mindy! I purchased my DST via https://seracapital.com/1031-e...

    Carl assisted me as a fiduciary consultant instead of a DST salesperson hoping to earn 6-10% commission on (actually out of) my investment. Once we identified the appropriate DST, I paid Sera Capital the prearranged flat fee and they instructed the DST sponsor to add 100% of the sales load into my investment.

    7Reply
  • Ken Cur
    Member since 2021 · 2 posts · 4 votes
    5y

    Has anyone considered/completed a 1031 into a DST where the exit strategy for the DST is 721 UPREIT exchange? This sounds appealing for the increased diversification offered via the 721 and a known exit strategy. My concern with the DST is driven by the overall state of the market at the moment - low cap rates where your risk is magnified by the interest only debt and fees the typical DST layers on the investment. With a planned 5-7 exit, there is potential to be "upside down". Welcome any thoughts and opinions!

    3Reply
    • Danielle S.
      Investor · Kenilworth, OH · Member since 2016 · 21 posts · 1 vote
      3w

      Did you end up doing this? I'd be interested in learning how it worked out for you.

      0Reply
  • Brandon BruckmanPro Member
    Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
    5y

    @Ken Cur you can still get upside down in that scenario. The sponsor of the deal typically is the one purchasing the property into their REIT. The property will be evaluated by two third parties to determine a fair market value. Then the sponsor will offer you REIT shares or cash (and the ability to 1031 exchange again).

    There is no reason that the property has to be profitable for you as an investor. The sponsor has the right to UPREIT whenever they want. In this scenario you are still investing in a DST and are subject to the risks you described. Review the agreement for how the UPREIT will work very carefully. How I described this is what we typically see, ever deal could be different.

    We do like the UPREIT option as it provides another exit mechanism for selling the DST. Plus the diversification you noted and it's a great estate planning tool (if we still have stepped up basis).

    Hope this helps a little.  

    1Reply
  • Ken Cur
    Member since 2021 · 2 posts · 4 votes
    5y

    @Brandon Bruckman Thank you Brandon! Very helpful. Maybe what I was thinking was that if I entered a DST with the known and possible exit strategy of 721 exchange, then I might compensate for the near to medium term potential risk of being upside down and realize a hit to capital at 5-7 yr exit. If my goal is long term hold and passive cash flow, it would seem the 721 would offer even more diversification. Over the longer term I would hope and expect market appreciation to erase the possibility of near term underwater risk. Also as I understand it once in 721 portfolio the investor has the option of redeeming shares (or not) on demand in partial or in full?

    1Reply
  • Brandon BruckmanPro Member
    Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
    5y

    @Ken Cur totally agree on diversification of 721.  You are correct on share redemption.  This provides a liquidity option during your lifetime. However, once you sell shares you will have some sort of tax bill to pay.  

    Once you pass, the shares could be a better option to move along to your family if you have multiple children in your estate. The shares are easy to split up or cash out quickly. Real estate or DST would naturally take longer to make liquid.

    0Reply
  • Art Webb
    Member since 2019 · 50 posts · 7 votes
    5y

    @Albert Wright. I would be interested in your flat fee DST broker and how your purchase went. Contact me here. Thanks !

    0Reply
  • Rw Pastore
    Member since 2018 · 5 posts · 1 vote
    4y

    Hi Mike Can you comment on how your DST investments are holding up? are you getting the advertised return when you first signed up? also have you had one DST end already and rolled the funds into another one? if so, did you get your initial investment back or make a profit besides the monthly payments? thanks Raymond

    0Reply
  • Kelly McClellan
    Rental Property Investor · Columbus, OH · Member since 2018 · 33 posts · 19 votes
    4y
    Originally posted by @Albert Wright:

    I am in the process of closing a 1031 DST transaction with a "flat fee" broker. Instead of paying a percentage (load) of the total investment, they accept a reasonable fee for their services and credited the load back into my DST investment. I will be happy to share if anyone is interested.

     Albert. I would like to discuss your experience with this broker. I appreciate any insight you might have to share. 

    Thanks!

    Kelly McClellan 

    0Reply
  • Adrian Lu
    Member since 2023 · 3 posts · 2 votes
    3y
    Quote from @Albert Wright:

    Thanks for clarifying Mindy! I purchased my DST via https://seracapital.com/1031-e...

    Carl assisted me as a fiduciary consultant instead of a DST salesperson hoping to earn 6-10% commission on (actually out of) my investment. Once we identified the appropriate DST, I paid Sera Capital the prearranged flat fee and they instructed the DST sponsor to add 100% of the sales load into my investment.


     Hi Albert,

    Thanks for this valuable info.  Would you mind updating us on how your DSTs have performed now that about 2 years have passed?  Would you have done anything differently?  I'm now where you were back in 2021, learning about DSTs for a 1031 exchange.  

    -Adrian

    0Reply
  • Account Closed
    Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes
    3y
    Quote from @Adrian Lu:
    Quote from @Albert Wright:

    Thanks for clarifying Mindy! I purchased my DST via https://seracapital.com/1031-e...

    Carl assisted me as a fiduciary consultant instead of a DST salesperson hoping to earn 6-10% commission on (actually out of) my investment. Once we identified the appropriate DST, I paid Sera Capital the prearranged flat fee and they instructed the DST sponsor to add 100% of the sales load into my investment.


     Hi Albert,

    Thanks for this valuable info.  Would you mind updating us on how your DSTs have performed now that about 2 years have passed?  Would you have done anything differently?  I'm now where you were back in 2021, learning about DSTs for a 1031 exchange.  

    -Adrian

    Hi Adrian,

    I sent you a personal message through Biggerpockets. Would love to get on a call to discuss the DST industry and how all the different brokers operate!
    0Reply
  • Adrian Lu
    Member since 2023 · 3 posts · 2 votes
    3y
    Quote from @Chris Stratton:

    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

    Hi Chris,

    Thanks for starting this thread!

    Would you mind giving an update on how your DSTs have performed?  Three years out, have you changed your opinion about Kay Properties at all?  I just sold a property in CA and have the funds in a 1031 exchange now.  Looking for a replacement property in TX, and wanting to fill in the remainder with DSTs. 

    -Adrian  

    1Reply
  • Kay March
    Gainesville, FL · Member since 2013 · 127 posts · 21 votes
    3y

    Consider that the 10% to 18% cost of the DST would be applied to the entire amount of the investment, whereas the capital gains tax would be applied only to the gain. The 10% to 18% cost of the DST would be repeated every time the DST terminates and a new 1031 exchange must be made into a new DST, maybe every 5 to 8 years, whereas the capital gains tax would be a one time cost.

    0Reply
  • Joe SeraBusiness Member
    MD · Member since 2021 · 29 posts · 16 votes
    3y

    @Kay March I agree with you there and a big reason why the 721 DSTs (also known as UpREIT DSTs) have gained so much popularity and DST market share.

    The total upfront costs to get into these 721 DSTs are less than 5% (assuming you're not working through a broker) and you don't have to pay 10-18% (or more) to exchange into a new DST every time your investment goes full-cycle.

    0Reply
  • Account Closed
    Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes
    3y
    Quote from @Kay March:

    Consider that the 10% to 18% cost of the DST would be applied to the entire amount of the investment, whereas the capital gains tax would be applied only to the gain. The 10% to 18% cost of the DST would be repeated every time the DST terminates and a new 1031 exchange must be made into a new DST, maybe every 5 to 8 years, whereas the capital gains tax would be a one time cost.


    Keep in mind that the DST sponsor more than likely is underwriting to overcome the front end load a few years after the DST is created. This means that when the DST sells, the goal is to return 100% of principle. Of course they would want additional appreciation on top of principal but any DST sponsor will tell you that they factor in the up-front load on their underwriting and likely will overcome that up front load.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free