A Delaware statutory trust (DST) has become a popular investment option because it allows members of an investor pool to hold an undivided fractional interest in real estate. This avenue, like all investment possibilities, has numerous aspects to consider. Here are the pros and cons of DSTs investors should be aware of.
Pros of DST Investments
Investors often choose DSTs for their convenience and financial benefits. The most notable advantages are the ability to earn passive income and the significant tax advantages they can offer.
Passive Income
Participation in a DST enables investors to become passive owners, allowing them to utilize real estate to grow their income without requiring active involvement. Property management companies handle the day-to-day operations of these properties and collect the rent, allowing investors to enjoy many of the benefits of property management without being landlords.
Some parties adopt the DST approach when they have been actively managing properties but wish to alter their relationship with that commitment. In such cases, a boutique firm specializing in both DSTs and exit planning, such as Sera Capital, can analyze individual situations and provide personalized recommendations to help investors make informed decisions. Because passive income opportunities can vary depending on numerous factors, professional guidance becomes instrumental in providing investors with accurate expectations.
Tax Advantages
Anyone interested in investing should always verify the tax implications before making a decision. Because Sera Capital has entire sections devoted to real estate, it is an excellent choice for people interested in DSTs or other sector-specific options.
The IRS permits investors to utilize a tax-deferred strategy by pursuing a DST 1031 exchange, which allows for the exchange of investment properties for large, high-value real estate. The tax agency treats this as a like-kind exchange and does not require parties to report gains and losses.
However, there are stipulations. For instance, exchanges of real estate primarily held for sale do not qualify for this tax benefit. Professionals from Sera Capital can clarify those details and others, helping investors understand whether a DST will provide the tax advantages they expect and offering additional information for broader tax-related perspectives.
Cons of DST Investments
Before committing to a DST, it is crucial to weigh the potential downsides carefully. The main disadvantages are the inability to easily access your invested capital and the risks associated with the sponsor’s management.
No Liquidity Control
An investor in the stock market who makes a spontaneous decision to sell some shares can do so with minimal or no hassle. However, DST investors do not have the same flexibility. The lack of liquidity control is one of the most significant downsides to know about because investors remain involved until the trustee decides to sell the property.
Even then, because the outcome will be one of several potential scenarios, affected parties will not immediately know the impact on their investment portfolios. That uncertainty highlights why obtaining information from an experienced exit-planning boutique firm such as Sera Capital is an essential step in receiving trustworthy information before taking action. Those professionals can help clients diversify their investment strategies and understand the most effective ways to limit adverse impacts outside their direct control.
In one case, an individual who made a $500,000 DST investment received a 4.7% annual return when the trustee sold properties purchased by the trust after it had held them for five years. That scenario occurred following a planned disposition to an institutional buyer after a hold period. The opposite outcome can also occur when DST properties are sold to distressed buyers, sometimes resulting in investors receiving less than their original investment.
Potential Inconsistency of Sponsor’s Actions
A DST sponsor purchases properties, structures them for this type of investment and manages the offerings. Although no investment guarantees a positive outcome, you should analyze the sponsor’s track record before making a decision. Because sponsors may make choices inconsistent with their histories, some investors consider this reality a downside of DSTs.
Begin by reviewing the sponsor’s current portfolio, but also check previous full-cycle DSTs. The associated information helps investors establish a pattern of events that allows them to determine specifics, such as investment underwriting trends, and compare previously stated projections to realities. Similarly, people should look for signs of transparency and trustworthiness from DST sponsors, such as a willingness to provide information about past performance.
Even after taking these steps, those considering DST investments should consider each one as an individual entity with associated risk factors. Parties should also gauge their tolerance for investments not going as planned by investigating the potential impact of such ramifications on other aspects of their lives before finalizing their decisions. Insights from professionals at Sera Capital can enrich investor perspectives with relevant case studies.
Get Informed Before Acting
Although these are some of the top pros and cons of DSTs, every situation is different. The professionals at Sera Capital recognize that while acting as a fee-only DST consultant. Unlike many competitors that rely on commissions, these providers aim to identify the best investment strategies tailored to each client’s unique situation. They will not steer them toward specific products for financial gain.
Interested parties can learn more by scheduling a free 20-minute consultation call. The associated insights will enhance investors’ positions by providing dependable information and transparency, regardless of one’s previous experience with this type of investment.
