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For accredited investors participating in a 1031 exchange, Delaware Statutory Trusts are a worthwhile investment option to consider. However, some investors are unaware that DSTs can also be purchased on a cash basis.
DSTs may provide a number of advantages to investors engaging in a 1031 exchange, including the possibility to postpone the realization of capital gains from the sale of investment real estate and the avoidance of some of the risks involved in finding a replacement property quickly.
However, there are additional potential DST advantages that can benefit investors as a complement to either outright real estate ownership or stock market trading.
Potential Advantage #1: Professionally managed passive income
Have your money working for you - DSTs are professionally managed by asset managers and property managers who are responsible for ensuring that the tenants pay their rent on time and delivering the investor a check, often every month (assuming funds are available). You never engage with any of the tenants and have no management duties as an investor.
Potential benefit #2: Geographic and real estate sector diversification
It's wonderful to make an investment and see it pay off. What if it doesn't, though? Any investment, whether it be real estate, equities, futures, commodities, jack's magic beans, etc… has the potential to incur losses. However, when one diversifies their portfolio by investing in numerous things, the risk is spread out.
Investors have access to a variety of DST real estate investments from different DST sponsors, including multifamily, storage space, commercial, and NNN leases. Additionally, you can invest in a specific type of DST, like multifamily, across a number of different geographic areas of the nation, increasing the likelihood that other locations won't experience a downturn in their local economies or, at the very least, lowering the likelihood that they will due to diversification.
Benefit #3: Supported by tangible assets
The fact that real estate is permanently anchored to the earth makes it one of the reasons why so many investors adore it. Real estate also has an inherent value, which means that it is fundamentally a hard asset with at least some minimal value, as opposed to a firm, whose shares can possibly lose all of its value should the latter go bankrupt. Of course, there is always the possibility of foreclosure or an uncovered natural calamity, but, as indicated before, no investment is without risk.
Potential benefit #4: traditionally less volatile and associated with the stock market
The stock market can be unpredictable, as we've recently witnessed during the coronavirus pandemic. Double digit market changes have, on some days, been the norm. The link between real estate and the stock market, however, has historically been smaller. Now, that doesn't mean that real estate can't also be volatile and incur a slump like we saw during the Great Recession of 2008/2009, but it is normally far less affected by market turbulence than the equity markets.
Access to institutional real estate is potential benefit number five.
Real estate is a popular way to possibly accumulate money and has several advantages as an asset type. Real estate, however, is not created equal. Real estate is similar to how there are blue-chip stocks and "junk" bonds. There are DSTs that allow investors to purchase "institutional-level" real estate, which is generally real estate that is thought to be of a certain grade and class such that huge institutions and significant investment funds would consider it. The majority of people would find it challenging to access these kinds of real estate investments on their own, but the DST structure enables them to indirectly hold a portion of these investments that they would not otherwise be able to.
Potential Perk #6: Low Minimum Investment for Accredited Investors (sometimes as Low as $25,000)
Sometimes as little as $25,000 can be invested directly in a DST as the minimal amount. This gives them access to DST real estate assets that would normally cost millions of dollars to acquire, finance, and operate on a fractional basis and is not a princely sum for the majority of accredited investors.
When investing, for example, in stocks, investors are compelled to pay capital gains on any profit that they make (note: Opportunity Zones may provide an option to defer those gains). However, under the current IRS code, investors have the choice to do a 1031 exchange into another property into which they own 100% or another partial DST, so delaying any capital gains, once a DST asset has been sold. Of fact, if President Biden's economic plan is approved, changes to the IRS rules, such as those under it, could alter how future earnings are treated.
Potential Advantage #8: Cash investors do not need personal finance clearance.
In contrast to buying a property directly and potentially needing to obtain financing from a lender, DSTs provide investors with non-recourse loans that are not dependent on the investor's capacity to obtain financing.
Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure:
No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood, and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward-looking statements are never an assurance of future results.
Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read, and understand all the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.
Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.
NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by Perch Financial LLC, Emerson Equity LLC, or any affiliate, or partner thereof. Perch Financial LLC does not warrant the accuracy or completeness of the information contained herein.
