Essential Insights on 1031 Exchanges in California

The Growing Trend: 1031 Exchanges as a Popular Exit Strategy for California Landlords

If you're a landlord in California contemplating the sale of your rental property, rest assured that you're not alone in considering this decision. Numerous factors have contributed to an increasing number of landlords opting to sell their properties in 2023. California currently leads the nation in outward migration, and the state's landlord-tenant laws are increasingly perceived as unfavorable towards property owners.

One significant incentive driving this trend is California's high capital gains tax, which currently holds the distinction of being the highest in the nation. However, this tax burden is no longer deterring landlords from selling their investment properties, thanks to the rising popularity of tax-deferred exit strategies such as the 1031 Exchange. With a 1031 Exchange, landlords can sell their investment properties without incurring immediate tax liabilities, thereby positioning themselves better to attempt to achieve their financial and lifestyle objectives through reinvestment.

These influential factors, coupled with potential unfavorable economic conditions and anticipated changes in tax laws, are prompting California landlords to seriously consider selling their investment properties sooner rather than later. Let's delve into the primary drivers fueling this emerging trend:

California's Outward Migration: Understanding the Economic Challenges

California, once regarded as a prime destination for investment property, is experiencing a significant shift in population dynamics. Historically, the state has been at the forefront of population growth in the United States since its establishment in 1850. However, recent data indicates a notable change.

According to the San Francisco Business Journal, California currently leads the nation in domestic out-migration, with over 367,299 residents having left the state as of July 1, 2021, based on Census data. The driving force behind this substantial shift is the issue of affordability.

The average price of a single-family home has surged by 23.9% compared to the previous year. With the increase in remote work opportunities, individuals no longer feel compelled to live within commuting distance of their employers, prompting them to trade high California rents for more affordable properties in other states.

While 2021 marks the first year of reported population decline, California has experienced a consistent loss of residents to other states over the past decade. According to the Public Policy Institute of California, between 2010 and 2020, the state saw a net loss of 6.1 million residents to other states, with only 4.9 million individuals relocating to California.

The primary drivers of this outward migration are the high cost of living, including the nation's highest state income tax, highlighting the real economic challenges faced by many in the post-pandemic world.

Challenging Landscape: California's Unfavorable Landlord Laws

Top view aerial photo of sea landscape representing the challenging landscape of Californias unfavorable landlord laws and the use of 1031 exchange for passive income in real estate

Landlord-tenant laws vary from state to state, with some statutes favoring tenants more than others. In the case of California, many consider its landlord/tenant laws to be the least favorable to property owners in the entire country.

While it is uncommon for cities to impose additional regulations on top of state laws, two major cities, San Francisco and Los Angeles, have implemented aggressive restrictions on landlords, further exacerbating the situation. As a result, these cities are often regarded as two of the most anti-landlord cities in the United States.

The implementation of the California Tenant Protection Act in 2019 brought about rent control and eviction laws that affect a majority of residential properties, including those in Los Angeles and San Francisco. In fact, over 85% of rental units in Los Angeles are subject to rent control, and in San Francisco, the last allowable rent increase was a mere 0.7%. Additionally, California landlords must demonstrate "just cause" in order to terminate a tenancy, further limiting their flexibility.

For anyone who owns residential rental investments, it is crucial to be well-versed in the specific landlord laws of the state and any city-specific regulations that may hinder their financial growth. Understanding these legal complexities is paramount in navigating the challenging landscape faced by landlords in California.

The Burden of Taxes: California's Highest Capital Gains Tax

When considering the sale of an investment property, one crucial factor that can deter property owners is the potential tax liability they would face. It's important to recognize that the total tax liability associated with the sale of an investment property encompasses more than just the federal capital gains tax. It also includes state capital gains tax, depreciation recapture tax, and net investment income tax.

For property owners in California, these taxes can be particularly substantial. The potential tax liability in California is the highest among all states in the U.S., with up to 42.1% of net proceeds potentially being paid as federal and state taxes. This high tax burden reflects the combination of federal capital gains tax rates and California's state capital gains tax rates, which significantly impact the overall tax liability for property owners in the state.

Understanding the significant tax implications is crucial for California property owners considering the sale of their investment properties. It is advisable to consult with tax professionals and financial professionals to assess the specific tax implications of a potential sale and explore strategies to mitigate the tax burden while maximizing returns.

The Popularity of 1031 Exchanges among California Landlords

Woman holding keys signifying real estate concept representing California landlords making passive income through 1031 exchanges

1031 Exchanges have gained significant popularity among California landlords due to the various benefits they offer, particularly in relation to the high tax liabilities faced by property owners in the state. The primary advantage of utilizing a 1031 Exchange when selling a rental property is the deferral of the substantial tax liability that California landlords would typically face. By deferring taxes on the relinquished property, landlords can reinvest a larger portion of the net proceeds into a replacement property.

Furthermore, a 1031 Exchange allows property owners to strategically choose a replacement property that aligns with their financial and lifestyle objectives. This provides an opportunity to select a more desirable location or property type that better suits their investment goals. For instance, landlords can transition from actively managed properties to investment real estate that potentially generates passive income, such as management-free 1031 Delaware Statutory Trust (DST) properties.

This flexibility enables landlords to exchange a multi-family rental property for fractional ownership in a larger, professionally managed institutional-quality property, such as Class-A multifamily, industrial, or medical office properties. By diversifying their investments through multiple replacement properties, landlords can also better mitigate risk associated with owning a single property.

In summary, the popularity of 1031 Exchanges among California landlords stems from the ability to defer taxes, reinvest a larger amount into replacement properties, strategically select properties that align with investment goals, and potentially transition to potentially passive income-generating investments. These advantages make 1031 Exchanges an appealing option for landlords seeking to optimize their real estate portfolios and address their financial objectives.

Understanding the Mechanism of a 1031 Exchange

A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, provides a means for selling investment real estate without incurring immediate capital gains tax. This tax deferral strategy allows investors to reinvest the sales proceeds into like-kind investment property of equal or greater value while adhering to the rules and timing requirements outlined in IRC 1031. The term "like-kind" refers to any real estate held for business or investment purposes, enabling exchanges between different types of investment properties.

While a 1031 Exchange offers a valuable opportunity to defer capital gains, depreciation recapture, and net investment income taxes, it is essential to recognize that these transactions can be complex. The flexibility lies in the range of strategies that can be employed, but strict adherence to the rules set by the IRS is crucial.

Failing to comply with IRS regulations can result in a failed Exchange, leading to the full tax liability becoming due, or a Partial Exchange, where a portion of the tax liability remains (typically the most significant portion).

Investors considering a 1031 Exchange should familiarize themselves with the workings of these transactions, including the specific rules and timing requirements established by the IRS. To gain a deeper understanding of 1031 Exchanges, we offer a complimentary guide, "Understanding 1031 Exchanges," which provides valuable insights and information. You can download this guide for free to enhance your knowledge about 1031 Exchanges and make informed decisions when selling investment property.

Determining Suitability: Is a 1031 Exchange the Right Option for You?

If you are contemplating the sale of your California rental property, a 1031 Exchange can present itself as a highly advantageous option, offering numerous potential benefits that contribute to the possibility of wealth growth.

First and foremost, understanding the tax liability associated with your relinquished property is crucial. This assessment will allow you to compare the net proceeds available for reinvestment with and without a 1031 Exchange. By deferring taxes through a 1031 Exchange, you can potentially retain a larger portion of your investment capital to reinvest.

Equally important is gaining a comprehensive understanding of the rules and timeline governing a 1031 Exchange. The IRS imposes strict regulations, and adherence to these guidelines is vital to qualify for tax deferral. Familiarizing yourself with these rules will ensure a smooth and successful exchange process.

To attempt to maximize the benefits of a 1031 Exchange, it is essential to establish clear financial and lifestyle objectives. The replacement properties you select should align with your specific goals, taking into consideration factors such as risk tolerance, desired cash flow, appreciation targets, liquidity needs, management control preferences, and estate planning considerations.

Seeking guidance from a licensed 1031 Exchange professional before selling your investment property is highly recommended. They can assist you in navigating the complexities of 1031 Exchange rules, accurately assessing your tax liability, and identifying suitable replacement properties that align with your financial and lifestyle objectives.

By consulting an expert in 1031 Exchanges, you can better ensure compliance with regulations, gain a comprehensive understanding of your options, and make informed decisions that seek to optimize the benefits of your investment strategy.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. 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. Any information provided is for informational purposes only.

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: 

Liquid vs. Illiquid Assets: Which is Better for Investors?

When it comes to investing, one important factor that must be considered is liquidity. Liquidity is the ease with which an asset can be converted to cash without affecting its market value. This means that the more liquid an asset is, the easier it is to sell it in the market without causing its price to drop significantly. In this article, we will discuss the pros and cons of liquid and illiquid investments and help you understand which one might be better for you.

Understanding Liquidity

Investments can be tangible or intangible assets. Tangible assets include real estate, art, and collectibles, while intangible assets include stocks, bonds, and other securities. Generally, tangible assets are considered to be illiquid because they can be harder to convert to cash. On the other hand, cash and cash equivalents are the most liquid assets because they can be easily converted to other assets.

In the case of debt securities, an investor could reference credit ratings issued by third parties to assess risk and liquidity. Bonds with lower credit ratings are generally considered riskier assets, and therefore the overall demand for these bonds is typically lower than those of higher credit quality assets. As a result, riskier bonds, also called junk bonds, will offer the lowest amount of liquidity but could offer the highest potential reward.

Illiquid Investments

Illiquid investments are those that cannot be traded or sold with ease without incurring a loss in value relative to their fair market value. Real estate, collectibles, and art are examples of illiquid assets.

These assets are considered to be illiquid because it is not easy to convert them to cash or another asset type. Therefore, investors will require compensation for the added risk of investing in illiquid assets. This added compensation is referred to as the liquidity premium.

When it comes to illiquid investments, it is important to note that degrees of liquidity will vary. For instance, some real estate is more desirable than others. Hedge funds and private market funds are other examples of illiquid investments. Liquidity terms amongst these funds will vary as well.

Liquid Investments

Cash and cash equivalents are the most liquid assets, followed by marketable securities like stocks and debt securities like bonds. Within these asset categories, nuances arise that offer varying degrees of liquidity.


Liquid vs. Illiquid Assets: Which is Better for Investors?

The decision of whether to invest in liquid or illiquid assets depends on various factors, including an investor's sophistication level, risk appetite, and investment objectives. Liquid assets can be easily converted to other asset types, while illiquid assets require a longer time to convert to cash or another asset. In general, the more illiquid an investment is, the greater the risk and associated liquidity premium will be.

However, illiquid investments often offer higher potential returns than liquid investments, and they have the potential to be less volatile in the short-term. Moreover, illiquid investments are historically less affected by market fluctuations and can provide a hedge against inflation. On the other hand, liquid investments are more suitable for investors who prefer short-term investments and need easy access to cash.


Liquidity is an important aspect of the financial market as it allows investors to buy or sell assets quickly and easily. This is particularly important for traders who are looking to make short-term gains, as they need to be able to move in and out of positions quickly. For example, stocks that are traded on major stock exchanges are typically considered liquid, as they can be bought or sold at any time during trading hours, and their prices are determined by supply and demand.

On the other hand, illiquid assets may not have an active market, making it difficult to buy or sell them quickly. This can result in the asset being priced lower than its fair market value, as there may be limited demand for the asset. Illiquid assets can include things like real estate, private equity, and certain types of bonds.

When investing in illiquid assets, investors need to be aware of the risks involved. In addition to the potential for a loss of value due to a lack of demand, illiquid investments may also be subject to a higher level of risk due to factors such as changing economic conditions, limited information about the asset, and the difficulty of finding a buyer if the investor needs to sell.

That being said, there are certain advantages to investing in illiquid assets. For example, they may offer higher potential returns than more liquid assets, as the added risk of holding the asset for a longer period may result in a higher payoff. Additionally, investing in illiquid assets can help diversify a portfolio, as they may not be as closely tied to the broader market as more liquid assets.

Overall, the decision to invest in liquid or illiquid assets depends on a number of factors, including the investor's financial goals, risk tolerance, and investment horizon. Investors who are looking for short-term gains and need to be able to quickly move in and out of positions may prefer more liquid assets, while those with a longer-term investment horizon and a higher risk tolerance may be more comfortable investing in illiquid assets.

It is important for investors to carefully evaluate their options and understand the risks before making any investment decisions.

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.

Business project team working together at meeting room at office.Horizontal.Blurred background.Flares

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:

The Growing Role of Alternative Investments

Why Investors Seeking Diversification Are Choosing Alternative Investments Increasingly

It is standard practice for people to open retirement accounts with their employers, then hand control of those accounts over to the plan's custodian, who will deploy the funds based on the participant's age, income, and retirement goals. Many consumers choose a hands-off strategy after the initial account setup and allow the custodian manage investments as they see fit.
The issue with this strategy is that the majority of custodians will opt to invest in conventional assets like equities, bonds, and mutual funds. Because of this, a person's portfolio is very vulnerable to the ups and downs of the stock market, and they are unable to invest in other places where they might receive superior returns.

This refers to alternative investments in this context. Alternative investments, traditionally seen as "too hazardous" for participation by private investors, are growing more popular. Individual investors are now imitating institutional and wealthy investors who have been making alternative investments for years. Alternative investments have the potential to offer individual investors a great deal of value, from diversification to increased stability, growth potential, and more.

Continue reading to find out more about investing in alternative assets, such as real estate, and how you can start doing so right away.

Alternative Investments: What Are They?

The majority of individuals are instructed to invest in a mix of stocks, bonds, and mutual funds, whether for retirement or other purposes. These publicly traded shares are the most popular investment options and are regarded as "conventional" investments. When someone refers to "diversifying" their portfolio, they typically mean investing in a variety of these equities, from historically "safer" bonds or mutual funds to "riskier" stock options. As a means of further diversification, some investors may choose to invest in particular industries (such as technology or energy), while others may want to do so in emerging industries (such as a "sustainable leaders" fund).

Whatever the case, all of these conventional investments are fairly liquid and closely correlated with the overall stock market action. It follows that the value of conventional assets may fluctuate, occasionally substantially, even on a daily basis.

Alternative investments frequently differ significantly from conventional ones.

Diverse assets, such as precious metals, collectibles like artwork or antiques, crops, and other commodities, might be included in alternative investments. They could also be investments in financial assets like hedge funds, distressed securities, carbon credits, venture capital, private equity, and distressed securities. The most well-liked alternative investment nowadays is real estate, notably private equity real estate.

Important Characteristics of Alternative Investments

A few crucial characteristics serve to set apart alternative investments from standard ones. These qualities consist of:

Very little historical association with the stock market.

Alternative investments typically operate more independently from the overall stock market than do standard stocks, bonds, and securities. This partly results from alternative investments' lack of liquidity (more on this below). Simply said, unlike conventional publicly traded securities, the majority of alternative investments cannot be quickly bought or sold with the press of a mouse. As a result of the lengthier lead times involved in buying or selling alternative assets, which frequently include a thorough due diligence period, these investments have historically been less susceptible to market volatility.

During the COVID-19 pandemic, investors had first-hand experience with this. When the pandemic was at its worst, the Dow once dropped 10,000 points in a single day. It has subsequently recovered, but in the interim, a number of other assets, many of which were real estate investments, maintained their worth (with a few notable exceptions, like hospitality which took a hit due to widespread pandemic-related restrictions on travel).

Identifying the underlying value may be challenging.

The fact that it can be difficult to determine the underlying value of these assets is one of the difficulties involved with investing in alternative investments and one of the reasons why these investments have historically been limited to institutional and high-net-worth investors. Those interested in alternative investments will discover that they are operating in a world of incomplete knowledge and marketing information, in contrast to investing in stocks or bonds, where the majority of data is publicly available.

One might be prepared to pay more for a certain property, for instance, if they have a strong personal connection to that investment. This is just one example of how the value of some things can be wholly subjective. Properties in tourist markets are a fantastic example of this phenomenon: if someone's family has a long history of taking vacations in Cape Cod, they might be willing to spend twice what someone else is willing to pay for that home. In this instance, the investor's willingness to pay a certain value may not be logical. The value that the "market" assigns to an item may also be unduly influenced by other factors, such as a person's desire to borrow against a property (and under what conditions). The market value of an alternative asset is simply the price that someone, even just one person, is willing to pay for it.

Lower liquidity compared to conventional investing.

Alternative investments tend to be less liquid than traditional investments. The lack of organized markets and the relatively low demand for certain of these assets in comparison to traditional investments might be used to explain the illiquidity (e.g., fine art).

In many alternative investments, the investor must commit to the transaction for a set amount of time or risk incurring penalties for an early exit. One could, for instance, invest in a real estate fund with a five-year minimum hold. Investors in this fund might be able to withdraw their money early, but doing so might incur some sort of withdrawal fee.

Alternative investments typically require significant due diligence and/or processing time for a transaction to complete, even in a situation where someone is free to buy or sell at any time. For instance, if someone wants to sell an office building, they still need to find a buyer, engage with a broker, and go through at least 30 days' worth of paperwork, processing, financing, etc. before the sale can be closed. The illiquidity of alternative assets is a result of this.

DST properties
DST properties

Historically prohibitive admission requirements.

The entry hurdles into alternative assets have always been very high. This is especially valid when it comes to expensive alternative assets, such "trophy" real estate. Only institutional investors and high-net-worth people had access to deals of this scale and value. The ability to conduct "general solicitation" made crowdfunding for alternative assets simpler after SEC regulations changed in 2014. This, in turn, has made it possible for people to invest in alternative assets in lower amounts for the first time.

What is the perception of these assets' "riskiness."

The idea that investing in these asset classes entails higher levels of risk than investing in more conventional asset classes like stocks or bonds is the original source of the term "alternative" investment. However, institutional investors have significantly expanded their allocation to alternative investments over the past 20 years as a result of technological advancements and better access to data regarding specific alternative investments. Institutional investors made an average of 5% in alternative investments in 2000; by 2020, that figure had risen to 30% or more. Alternative investments are becoming increasingly commonplace as a result of their historical and potential risk-adjusted total returns, net of expenses.

True diversification is provided by alternative investments.

Investors can truly diversify their investing portfolios by making alternative investments. Generally speaking, experts advise putting between 15 and 20 percent of your holdings into some sort of alternative asset. Institutional investors invest more than this amount; endowments and pension funds occasionally allocate more than 30% of their assets to alternative investments, respectively. Individual investors currently invest just an average of 5% in alternatives, a figure that most experts advise tripling or quadrupling.

Diversification has a number of advantages. One benefit of diversification is that it might potentially increase stability and shield a portfolio from market fluctuations. Two: People may be able to increase returns by investing in alternatives instead of low-yielding asset types like government bonds.

Compared to traditional investments, alternative investments frequently aim for higher returns.
Compared to typical investments, many alternative investments have the potential for better returns. When examining risk-adjusted returns over a decade or longer, this is especially true. For instance, over a 20-year span, farms, timberland, and real estate all beat the S&P 500. Sometimes even more astounding were the absolute returns. For instance, the average total return on farmland from 1992 to 2018 was 10%, combining income and price growth.

Historically, alternative investments have frequently performed admirably during times of market turbulence. An otherwise significant drop in stocks and bonds was avoided thanks to alternative investments' superior performance in the early days of the pandemic, according to an EY report released in November. Alternative investments and diversification in portfolios protected them from potentially devastating losses.

"During Covid-10, alternative managers exceeded performance expectations, particularly in private equity, when a 4:1 ratio of investors believed their managers exceeded expectations. Although hedge fund success varied by strategy, on the whole, nearly all of them greatly outperformed key benchmarks. Early in 2020, when major indices were down by 15-20%, several hedge funds were merely down by low single digits. Funds proved valuable by protecting cash during the recession and swooping in when appropriate to profit from market turbulence."

We are currently experiencing a period of historically low interest rates, which is one of the reasons alternative investments are doing so well. While inflation is closer to 2 percent, the rate on 10-Year U.S. Treasury bonds is less, hovering at 1.6 percent. Greater yield-seeking investors are forced to choose investments with higher levels of risk, which frequently directs them to alternative investments like real estate.

Investing in Alternative Assets: A Guide

The process of investing in alternative assets has historically been time-consuming, difficult, and expensive, leaving regular investors perplexed and unhappy. Investing in alternative assets is now simpler than ever thanks to improvements to SEC rules and regulations.

There are several ways to begin. One strategy would be to sell your stocks or bonds and/or put your funds straight into a different asset class. For instance, you may accomplish this by working directly with a fund manager that specializes in alternative assets or a real estate sponsor. Individuals can participate in fractional shares of private equity firms like Delaware statutory trusts (DSTs), which enable them to invest in alternative assets like real estate.

A self-directed IRA (SDIRA) with an alternate asset custodian is another choice for rolling over your standard or Roth IRA. You can then invest in alternative assets of any kind through the SDIRA, including but not limited to real estate, DSTs, or other investments. In order to hold title to the assets on your behalf, the SDIRA will first facilitate the transaction.


Previously regarded as being too hazardous for private investors to invest in, alternative assets are now more widely accepted. Real estate will undoubtedly be an alternative that investors wishing to diversify their portfolios should think about. If you want to try to reduce the risk normally connected with alternative investing, investing with a real estate sponsor or fund that has a long track record of performance is a wonderful way to do it.

Are you prepared to begin? Get in touch with us right now to find out how our DST and real estate investment platform may assist you in your efforts to put your money to work.

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:

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