Can a Title Company Perform as a Qualified Intermediary?

A 1031 exchange can be a powerful addition to your investment strategy, with the potential to defer capital gains taxes. However, as with any powerful tool, investors must use it with care and precision. The IRS has strict guidelines for structuring a real estate transaction using a 1031 exchange, and taxpayers must adhere to these rules to avoid any issues. A Qualified Intermediary (QI), also known as an Exchange Accommodator, is a vital player in executing a successful 1031 exchange, which is required by the IRS.

The role of QI includes several important tasks, such as:

-Managing paperwork, including identifying potential replacement properties and recording the use of funds from the sale.

-Holding the sale proceeds in escrow, ensuring the taxpayer does not have access to these funds during the exchange process and facilitating the purchase of the replacement property using those funds.

It is important that the Qualified Intermediary is carefully chosen and the exchange follows all rules precisely to avoid issues with the IRS. The QI should be independent of the taxpayer, cannot be related to the taxpayer, and should have a good track record of successful exchanges.

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Qualified Intermediary Requirements:

The IRS has outlined the specific individuals or entities that cannot act as Qualified Intermediaries (QI) in a 1031 exchange, such as the taxpayer, any related parties, or an agent of the taxpayer. However, it does not have any requirements for the qualifications or characteristics a QI should have.

QIs are not regulated by the government but they may belong to the Federation of Exchange Accommodators.

When looking for a QI, it is important to consider their experience in conducting 1031 exchanges, asking specific questions about their track record of successful exchanges, and inquiring about their internal controls and how they handle client funds.

It is also important to remember that certain companies like title companies may act as a QI, as long as they meet the IRS guideline and are not disqualified.

It is generally acceptable to use a title company as a Qualified Intermediary (QI) for a 1031 exchange. Title companies are typically experienced and knowledgeable in real estate transactions, and therefore well-equipped to complete the exchange process successfully.

One of the main reasons why title companies may be chosen as a QI is because they often hold purchase funds in escrow, which is also a necessary step for a 1031 exchange. This means that the title company would already have the necessary infrastructure in place to hold and manage the proceeds from the sale of the original property, and subsequently disburse those funds to purchase the replacement property.

Title companies also have knowledge in clearing access to the title and in completing the required forms for the IRS. They have experience in dealing with legal and regulatory requirements for property transactions and thus have the understanding of the rules and procedures required in a 1031 exchange.

It is important to remember that for a 1031 exchange to succeed, the QI must ensure that all the rules and regulations are met including the timelines, identification rules, and completion and transmission of necessary forms. It is also crucial that the title company is independent of the taxpayer, not related to the taxpayer and should have a good track record of successful exchanges. It is also recommendable to inquire about the QI's internal controls and how client funds are held and handled.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Unlock the Secrets of 1031 Exchanges: The Ultimate Guide


A 1031 exchange, also known as a Starker or like-kind exchange, is a powerful tax-saving strategy that allows real estate investors to defer taxes on the sale of a property by using the proceeds to purchase a similar "like-kind" property. This allows investors to reinvest their capital in new, properties without paying taxes on the sale of the previous property.

This guide is the ultimate guide for real estate investors looking to unlock the secrets of 1031 exchanges and maximize their returns. We'll start by explaining the basics of 1031 exchanges, including the rules and regulations, the 45-day identification period, and the 180-day exchange period. 

Next, we'll delve into the benefits of 1031 exchanges, including how they can allow real estate investors to defer taxes, how they can benefit both commercial and residential property owners, and how they compare to traditional real estate investment methods. We'll also cover strategies for successful 1031 exchanges and special considerations for commercial properties. By the end of this guide, real estate investors should have a solid understanding of how to use 1031 exchanges to defer taxes and maximize profits.

What are 1031 exchanges, and how do they work?

A 1031 exchange is a tax-saving strategy that allows real estate investors to defer paying taxes on the sale of a property by using the proceeds to purchase a similar "like-kind" property. To qualify as a 1031 exchange, the property being sold and the property being purchased must be used for investment or business purposes. This means that primary residences do not qualify for a 1031 exchange. 

The IRS has strict rules and regulations that must be followed in order to execute a 1031 exchange properly. 

One of the most important rules is the 45-day identification period, during which the investor must identify up to three potential replacement properties. Additionally, the investor must complete the exchange and acquire one of those properties within 180 days of selling the original property. 

In addition to these rules, there are some restrictions on the type of transactions that qualify for a 1031 exchange, including related party transactions and cash boot, which happens when an investor receives cash or other non-like-kind property as part of the exchange. Mortgage assumptions also need to be considered as well. 

By understanding these rules and regulations, real estate investors can properly execute a 1031 exchange and defer paying taxes on the sale of their property.

The benefits of 1031 exchanges for real estate investors

1031 exchanges offer a number of benefits for real estate investors. One of the most significant benefits is the ability to defer paying taxes on the sale of a property. When an investor sells a property and uses the proceeds to purchase a similar "like-kind" property through a 1031 exchange, they can defer paying taxes on the sale until they sell the replacement property. This can significantly increase the investor's cash flow and overall returns. 

Another benefit is the ability to diversify and expand investment portfolios by using the proceeds from the sale of a property to purchase multiple properties or different types of properties, such as multifamily or commercial. This can help to spread risk and increase potential returns. 

Additionally, 1031 exchanges allow investors to defer taxes on property appreciation and to use leverage to acquire new properties, which can increase the potential for profit. 1031 exchanges are also beneficial in the long term, as they can be used in a series of exchanges, allowing the real estate investor to compound the tax-deferral effect over time, which can lead to significant tax savings. 

It's important to keep in mind that the Tax Cuts and Jobs Act of 2017 placed some limits on 1031 exchanges, and investors should consult with a tax professional to ensure compliance and maximize the benefits of a 1031 exchange.

Strategies for successful 1031 exchanges

When it comes to executing a successful 1031 exchange, there are a few key strategies that real estate investors should keep in mind. The first step is to identify the right property to purchase as a replacement property. This means researching the local real estate market and looking for properties that will provide a good return on investment. 

It is also important to have proper legal and financial advice. It is recommended that you consult with a real estate attorney or a qualified intermediary who can guide you through the process and make sure that the exchange is completed in compliance with the IRS regulations. Additionally, keeping good documentation is important. It is important to keep records of all the transactions and communications regarding the exchange. 

This will be helpful in case of an audit or for any other legal issues that might arise. Investors should also be familiar with the best practices for structuring the transaction, such as using a Qualified Intermediary to hold the proceeds from the sale of the relinquished property. It is also important to understand how to maximize the benefits of the exchange by identifying and selecting properties with the best potential for appreciation, cash flow, and diversification. 

Special considerations for commercial properties and 1031 exchanges

1031 exchanges can be a powerful tool for real estate investors looking to purchase or sell commercial properties. One of the key benefits of using a 1031 exchange to purchase commercial properties is the ability to defer taxes on the sale of an existing property and use the proceeds to purchase a new commercial, or rental property. This can significantly increase the investor's cash flow and overall returns. 

When it comes to commercial properties, the role of property management companies can also play a key role in a 1031 exchange. A good property management team can help to ensure that the property is well-maintained and generates a consistent income stream, making it more attractive as a replacement property in a 1031 exchange. 

It's important for investors to consider these factors when looking to execute a 1031 exchange on commercial properties to ensure that the exchange is structured in a way that maximizes the benefits and minimizes the risks.

Are 1031 Exchanges Affected by The Tax Cuts and Jobs Act?

The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the US tax code, which included provisions related to 1031 exchanges. Under the TCJA, 1031 exchanges are still allowed but with some limitations that investors should be aware of when planning a 1031 exchange. 

One of the main changes was to limit the ability to defer taxes on business and investment property to only real property and not personal property. This means that investors can only use 1031 exchanges to defer taxes on the exchange of real property, such as land and buildings, but not personal property, such as equipment and vehicles. 

It is important to consult with a tax professional to understand the current state of the 1031 exchange laws and to ensure compliance with the TCJA.

Estate Planning and the 1031 Exchange

When it comes to estate planning, 1031 exchanges can play an important role for real estate investors. A 1031 exchange allows investors to defer taxes on the sale of a property by using the proceeds to purchase a similar "like-kind" property. 

This can provide significant tax savings over time, as the investor can continue to defer taxes on each subsequent sale and purchase. This can be particularly beneficial for investors who own a significant amount of real estate, as it can help to preserve more of the estate's value for future generations. 

It's essential for real estate investors to have a comprehensive understanding of how 1031 exchanges fit into their overall estate planning strategy to be able to make the best decision for themselves and their loved ones.

In this guide, we've explored the benefits and strategies for successful 1031 exchanges for real estate investors. We've covered the basics of what a 1031 exchange is, the rules and regulations that must be followed, and the benefits of deferring taxes and expanding investment portfolios. 

We've also explored how 1031 exchanges can particularly benefit a real estate investor. It is important for real estate investors to consider using 1031 exchanges as a strategy for deferring taxes and maximizing profits. By understanding the rules and regulations, identifying the right replacement property, and following best practices for structuring the transaction, investors can increase their chances of executing a successful 1031 exchange. 

However, it's important to consult with a tax professional to ensure compliance and maximize the benefits of a 1031 exchange. In conclusion, a 1031 exchange can be a powerful tax-saving strategy for real estate investors, and they should consider it as a viable option when they are looking to sell or buy a property. 

It can help them defer taxes and maximize profits, leading to long-term success in the real estate market.

Crowdfunding, TICs, DSTs & REITs - What's the Difference?

Some consumers are confused by the distinctions between the numerous possibilities available to them as real estate investing becomes more popular. Should they put their money into a Delaware Statutory Trust (DSTs), a real estate fund, a tenant-in-common (TIC), a real estate investment trust (REIT), or a real estate crowdfunding website like Fundrise? All provide co-investment options, but every one has unique characteristics that could affect the choice of each investor.

The contrasts between each of these passive real estate investment vehicles are examined in this article. The possible merits and drawbacks of each will be discussed, with a focus on some of the potential tax advantages that investors may or may not be able to take advantage of with each, including 1031 exchanges.

Trusts that invest in real estate (REITs)

A company known as a "REIT," which stands for "Real Estate Investment Trust," owns and/or manages commercial real estate that generates income. REITs come in a variety of forms. Others are more open-ended in terms of product type and instead concentrate on specific geographies. Some specialize in particular product kinds, such as multifamily, retail, hospitality, senior housing, self-storage, industrial, etc (e.g., commercial real estate in the Southeast or Midwest).

A person purchases a share in the business that owns and manages the real estate when they invest in a REIT. They are not investing in a real estate asset or a portion of a real estate asset. Comparable to purchasing shares of Apple, Philip Morris, or Berkshire Hathaway is purchasing a REIT. You invest in the firm, not its particular products, when you purchase these stocks. The same idea holds true for REITs.

For those with little investment capital, REITs are a popular alternative to invest in commercial real estate. REITs have a low entrance cost; an individual share costs less than $100. The advantage of investing in REITs is that their shares are typically very liquid; publicly traded REIT investments may frequently be bought and sold with the click of a button, just like other equities or bonds. Those who wish to diversify their portfolios by investing in commercial real estate but who cannot or do not want to have their capital tied up for extended periods of time find REITs, at least those that are publicly traded as opposed to private REITs, to be particularly alluring.

An organization must satisfy the following requirements in order to be considered a REIT:

At least 75% of the total assets of the corporation must be made up of real estate;
That rental portfolio, which may comprise both rents and the sale of property, must provide at least 75% of the company's total revenue;
At least 95% of gross revenue must come from passive sources;
At least 90% of the company's taxable profits must be distributed to shareholders as dividends on a regular basis;
After the first year of operation, the company must have at least 100 shareholders, with no more than 50% of the total shares being held by five or fewer investors. Additionally, the company must be organized as a taxable organization that is governed by a board of directors or trustees.
One of the major challenges businesses encounter when attempting to qualify as a REIT is the demand for at least 100 shareholders.

Many REITs are traded openly on the stock exchange, unlike traditional real estate. REITs that are traded publicly must register with the SEC. Others are privately traded, in which case they are exempt from SEC registration requirements. Typically, privately traded REITs are only available to accredited and institutional investors.

The ability to preserve liquidity is the main advantage of investing in a publicly traded REIT. Their REIT shares are just as simple to trade as other stocks, bonds, and equity securities. REIT shares, on the other hand, are more erratic as a result. They fluctuate in value with the market, with shares sometimes doing so often on a daily basis.

The fact that REITs do not enjoy the advantages of real estate ownership, such as the mortgage interest deduction, depreciation, and 1031 exchanges, is another disadvantage of REITs. By selling an asset and then buying similar-type property with the profits, investors can use a 1031 exchange to postpone paying capital gains tax. Using 1031 exchanges, many investors can postpone paying capital gains taxes—often indefinitely—while shifting into higher-valued assets and expanding their real estate holdings. Investors in REITs are not permitted to use this significant tax-saving strategy, but DST and TIC investors are.

Property Equity Funds

Investment funds come in a variety of forms, such as mutual funds, money market funds, and hedge funds. Real estate funds are merely another category of investment funds that are solely dedicated to buying income-producing real estate.

An alternate means of investing in commercial real estate is through real estate funds. Real estate funds will combine money that has been collected from various investors and sources. Depending on the predetermined investment criteria of the fund, the fund will subsequently invest that money on behalf of the investors. Similar to REITs, some funds will define investment criteria based on the type of product (such as multifamily, retail, or office), while others will focus investments in a particular geographic area (such as the Northeast or Southwest) regardless of the type of product.

A stringent investing philosophy, such as value-add development or ground-up development, is also typically adopted by some real estate funds. Other funds can be established up to acquire and hold stabilized assets.

Typically, real estate funds are organized as either limited partnerships or limited liability corporations (LLCs) (LP).


In either scenario, they are typically led by a sponsor who has years—if not decades—of expertise in the real estate sector. The fund management will evaluate each investment opportunity and use the pooled funds to invest in a few chosen transactions depending on the fund's criteria.

Investors that prefer to be completely passive and delegate all duties to the sponsor are frequently drawn to real estate equity funds. Investors in funds should adopt a long-term mindset because assets are typically illiquid and tie up capital for years (and if withdrawn early, will be subject to fees and penalties). A fund's investment minimum is typically between $50,000 and $100,000, though it can often be significantly higher.

The sale of a property or portfolio of properties in a traditional LLC/LP offering does not provide passive investors with the same tax advantages as a TIC or DST, namely a 1031 exchange. Investors are responsible for capital gains and depreciation recapture when the property is sold, which results in a taxable event.

The "drop and swap" trade, which calls for the company (the LP or LLC) to execute "drop down deeds," which are deeds that transfer title out of the company and down to the individual members or partners as tenants-in-common (TIC) with undivided fractional interest, is the exception to this rule.

In order to comply with the 1031 rule that states that the property must be "kept for productive use in a trade or business or for investment," the TICs must continue keeping the property for a specific amount of time (usually, two years is seen to be the minimum). If not, the drop-down deeds are regarded as proof that the property is being held for sale, which disqualifies it from being eligible for a 1031 exchange. A few years of holding the property as TIC can help demonstrate investment intent. Individual investors can sell their TIC interest as surrendered property after the holding period has passed and either complete a 1031 exchange on their own or pay their respective capital gains and walk away with the sale profits.

Although drop and swap exchanges take a lot of effort and are rarely pursued by equity fund sponsors, it is important to remember that these swaps are technically feasible for those looking for the advantages of 1031 exchanges. People who want a more straightforward, well-defined method will typically choose to invest in a DST instead (see below).

Tenants-in-Common (TICs)

Tenant-in-common, or TIC, ownership of real estate is another way to invest in it. Each co-owner of a TIC has a proportionate share of the property's title, according to their total equity contribution.

TICs are distinctive in that all participating members must agree to every choice, including the most basic ones like who to refinance with. Although the 35 members (or "co-owners") of TICs may appear like a tiny number, in reality, this might make decision-making more difficult. Additionally, it implies that investors are more active than those who participate in purely passive investment vehicles such as REITs, funds, or DSTs.

The federal government declared that TIC assets might benefit from 1031 exchanges at the beginning of the twenty-first century. Up until the Great Recession began in 2008, this led to an increase in TIC investments. When real estate prices fell, TIC popularity also fell. Investors were held individually responsible for the debt on the property (compare that to a DST in which it is the DST Sponsor that is solely liable for debt repayment, not the investors). During the economic downturn, TIC investors frequently found it difficult to come to consensus on the best course of action, and as a result, many TICs failed to survive. A number of these properties went under foreclosure, and investors completely lost their equity investments.

Due to the problems that TICs have revealed, many investors no longer like them. Instead, people seeking to co-own real estate typically make DST investments (more on DSTs below). It is important to note that TIC investors can use 1031 exchanges, which allows them to defer 100% of any potential gain and depreciation recovery from their initial investment. As a result, value-add investors seeking co-ownership will frequently choose TICs since DSTs typically only invest in stabilized, cash-flowing assets.

Deleware Statutory Trusts (DSTs)

Another form that is frequently utilized by persons looking to co-invest in real estate is a Delaware Statutory Trust, or DST. The majority of DST programs are provided by third-party broker dealers and sponsored by sizable, seasoned national real estate organizations. The property(ies) to be offered under the trust are purchased by the DST sponsor with their own money. The asset(s) are subsequently made fractionally owned by the DST sponsor available to investors. Investors are absolutely passive when it comes to DSTs.

A direct beneficial ownership interest in the underlying asset(s) is acquired by someone who invests in a DST, allowing them to report the item on Schedule E of their tax returns.

Due to this direct ownership interest, DST investors enjoy many of the same tax benefits as those who purchase and own real estate on their own, including the option to use depreciation to possibly offset income from the property. A 1031 exchange can be used by investors to invest in and out of DSTs.

Crowdfunding Websites

Since the federal JOBS Act relaxed the restrictions on how people can raise funds for commercial real estate ventures in 2012, crowdfunding has gained popularity. Previously, project sponsors had to be personally acquainted with the investors in their projects, but today, sponsors are allowed to participate in "generic solicitation." Due to this, real estate crowdfunding websites like RealCrowd, Fundrise, and RealtyMogul among others came into existence.

In order to invest in real estate ventures, a project sponsor (often a real estate corporation, LP, or LLC) aggregates money from a large number of investors (dozens, if not hundreds).

Fundraising websites like Fundrise are essentially the same as the equity funds mentioned earlier. Instead of the sponsor having to hold individual meetings to pitch to investors, the platforms are just a tool for putting money into a fund online. These platforms allow sponsors to expedite their capital raising, but in the end, a person invests in a fund, not the platform.

As a result, much like with conventional equity funds, the investors won't be allowed to participate in a 1031 exchange when it comes time to sell the property. Investors are required to pay capital gains tax on their profits when they sell the property because this constitutes a taxable event.


Real estate co-investment can be done in a variety of ways. Each of these investment vehicles has advantages and disadvantages of its own, as well as varied levels of tax benefits. DSTs and TICs enable investors to use their 1031 exchange dollars, which is a substantial advantage.

Contact us right away if you're interested in finding out more about DST investments and 1031 exchanges. We would be pleased to go over the advantages of DST investing in greater depth with you as well as the current options.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Cash Investments in DSTs - An Alternative to Investing in the Stock Market

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.

Why think about making an investment in DSTs?

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.

1031 Exchanges California
1031 Exchanges California

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.

DSTs allow investors to perform a 1031 exchange when the investment property is sold, according to current IRS regulations.

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.

Where Do I Consider Investing My Money Today?

Today’s market offers investors a plethora of investment opportunities across numerous industries. While having multiple options can help improve an individual’s investment strategy, they can also cause uncertainty, raising questions about which investment suits the person’s financial objectives. To help provide direction on which investment is right for you, we will outline the basic elements of today’s most desired investments and briefly review the pros and cons of each one.

For this article, we will divide the information into two sections. First, we will look at more traditional investment options, such as investing in stocks or bonds. Next, we will review alternative investments. Although less known among today’s investors, alternative options offer potential perks that many traditional investments lack.


Traditional Investment Options

Historically, investors have relied upon a 60/40 portfolio composition to help them achieve their long-term financial dreams, such as building a nest egg for retirement, repaying a mortgage early, or paying educational expenses for their children. According to this model, an investor’s portfolio should consist of roughly 60 percent stocks and 40 percent bonds. This model historically tended to deliver investors stable growth and income to help them meet their financial goals.

Stocks, or equities, are securities that represent fractional ownership in a corporation. Investors buy stocks and rely upon the corporation’s growth to increase their wealth over time. Additionally, stocks may offer investors dividends – or payments to shareholders – for passive income. On the other hand, bonds are debt securities offered by a corporation or government entity looking to raise capital. Unlike stocks, bonds do not give investors ownership rights, but rather they represent a loan. The most significant difference between stocks and bonds is how they generate profit: stocks must appreciate in value and be sold later on the stock market, while most bonds pay fixed interest over time.

While stocks offer investors the potential for higher returns than bonds, bonds are generally considered a less risky investment. As a result, many investors turn to investment funds, such as mutual funds, exchange-traded funds, or closed-end funds, to diversify their portfolios while maintaining a 60/40 composition. These investment funds pull together capital from multiple investors, which is then invested into a portfolio of stocks and bonds. Investment funds offer investors the potential to mitigate risk through a more balanced portfolio.

A Change in the Portfolio Model

Due to ongoing volatility in the stock and bond market, rising prices for commodities, and high equity valuations, the traditional 60/40 portfolio model is no longer serving investors to the same degree it once did. As a result, many financial experts are now recommending that investors diversify their portfolios with 40 percent alternative investments to help potentially improve their financial position. 

Alternative Investments

While numerous types of alternative investments exist, we will focus on alternative real estate investments due to the benefits they can possibly offer investors in today’s market. 


Why real estate?

Real estate has long been one of the most sought-after opportunities for investors. As a limited commodity, real estate has historically afforded investors the potential for long-term security, great returns, passive income, tax advantages, and a hedge against inflation. However, real estate investments also come with certain disadvantages. Getting started in real estate investing typically requires an extensive amount of capital and strong financials for those who are leveraging debt. Furthermore, real estate generally requires active participation – investors are required to manage their assets to ensure optimal performance.

Therefore, alternative investments in real estate have started growing in popularity among the investment community. While they can often offer similar advantages to real estate investing, they deliver a passive opportunity, meaning they have zero management responsibility. Here are a few options for investors seeking alternative real estate investments.

Real Estate Investment Trusts

A real estate investment trust (REIT) is a company that owns and typically operates income-producing real estate or related assets. REITs incorporate all asset types, including multi-family, retail, senior living, self-storage, hospitality, student housing, office, and industrial properties, to name a few. Unlike other real estate investments, REITs generally purchase or develop real estate for a long-term hold.

Investors rely on a REIT professional’s understanding of the real estate market to diversify and stabilize their portfolios. Many REITs are publicly traded, meaning that all investors, including unaccredited investors with limited capital, can invest in them.

While publicly-traded REITs deliver many advantages associated with traditional real estate investing – such as income potential, diversification, and possible inflation protection – they also come with some distinct disadvantages. For example, REITs often experience slow growth. Because REITs must pay out at least 90 percent of their profits in dividends, new acquisitions and developments are limited. To determine the strength of an investment, potential investors should conduct due diligence – with the help of an expert – on the REIT prior to purchasing shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a legally recognized real estate investment trust where investors purchase an ownership interest, or fractional ownership, in a real estate asset or real estate portfolio. DSTs are commonly relied upon by 1031 exchange buyers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

In addition to providing investors passive income potential through a management-free investment, DSTs enable investors to invest in institutional quality assets to which they would not otherwise have access. These assets may be able to deliver higher returns and longer-term stability. Furthermore, the debt structures of DSTs are attractive to many investors. People who invest in DSTs have limited liability equal to their investments; however, they are able to take advantage of the often attractive financing obtained by the sponsor companies. Unfortunately, only accredited investors can invest in DSTs.

Opportunity Zones

Opportunity zones (OZs), defined by the IRS, are “an economic development tool that allows people to invest in distressed areas in the United States. This incentive's purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.” OZs were introduced under the Tax Cuts and Jobs Act of 2017, and investors interested in investing in an OZ must do so through a qualified opportunity fund (QOF).

QOFs can be a superb option for investors due to their tax benefits, which depend on the length of time an investor holds a QOF investment. We have previously explained these benefits, which we refer to as OZ triple-layer tax incentives. Here’s a snapshot of the tax benefits a QOF offers an investor:

While opportunity zones are considered a risky investment, given their purpose, they can potentially deliver investors higher returns when compared to other alternative real estate investment options.

Interval Funds

An additional alternative investment option worth mentioning are interval funds. These funds are not limited to real estate but instead can be used to invest in many securities, including real estate. Similar to previously mentioned funds, interval funds pull shareholder capital together to invest in different securities. However, they offer a lower degree of liquidity. Instead of being able to trade shares daily, investors are typically limited to selling their shares at stated intervals (i.e., quarterly, semi-annually, or annually). The benefit of interval funds is the flexibility they offer the funds – they allow the fund to execute longer-term strategies, creating the potential for a more stable investment. As a result, interval funds tend to deliver higher returns and a more diversified opportunity.

Now, where do I invest my money today?

While the above information offers a snapshot into the pros and cons of various investment options, you should consider additional aspects. Rather than immediately trying to identify which option is best for you, the key takeaway here is to understand that today’s market offers an array of investment options that were previously unknown to many. Investors can diversify beyond stocks and bonds, which can possibly provide them with higher returns while seeking to mitigate risk. To develop an investment portfolio that meets your financial goals, we advise you to speak with a financial professional at Perch Wealth.


General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•          There is no guarantee that any strategy will be successful or achieve investment objectives;

•          Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•          Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•          Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•          Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•          Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•          Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits