A DST is a co-investment strategy in which real estate sponsors and accredited investors purchase a beneficial interest in a single asset and a portfolio of properties through a distinct legal organization. DSTs are remarkable for being tax-deferred 1031 exchange-friendly, which we’ll discuss later.
Formerly, DSTs were the last resort. Still, with the increasingly authoritarian picture for landlords brought on by rent control and new rules permitting renters to skip rent payments, DSTs are becoming a more viable option. Investors will find something quite similar to what they presently possess, except it is handled wholly and remotely passive. Something that enables them to detach themselves from day-to-day decision-making entirely. They could discover that the DST is a good fit.
The trust forms when a real estate corporation identifies and purchases investment properties. The trust then opens up the investment pool once the DST properties for sale are found and the purchase is complete. Individual investors can then purchase ownership shares in the trust. As these investors contribute money to the trust, a portion of ownership based on their contribution is provided. The trust’s ownership reduces as the amount of invested funds increases, and the assets become entirely held by the investors.
This ensures that no single owner has entire ownership of the assets and that all investors are entitled to a share of any income created by the trust’s properties.
Structure & Fees
Although a Delaware Statutory Trust has some resemblance to a tenant-in-common (TIC) structure, it is more investor-friendly. Unlike conventional TIC structures, special purpose corporations, and personal guarantees, DST investors merely need to sign a trust agreement. This grants them an unencumbered pro-rata Class B beneficial interest in the stated Delaware Statutory Trust.
The Delaware Statutory Trusts business takes sole ownership of the real estate. The Sponsor can serve as trustee, manager, and master lessee per the trust agreement. This arrangement gives them complete authority over the commercial real estate investment’s day-to-day activities, subject to the IRS’s limits.
The ability to earn utterly passive income is one of the benefits of investing in a Delaware Statutory Trust. Even if investors eventually control a majority or all of the properties, the Sponsor is still responsible for all administration of the trust’s assets. The Sponsor, who works under the trust’s authority, is in charge of discovering and purchasing property and managing the trust. The trust is responsible for any repairs that need correction to the property and the process of advertising the property to attract tenants, repairs, upkeep, rent collecting, and other areas of property management. DSTs are an option for those who are no longer interested in being personally involved because they provide a passive income possibility for investors.
How Do I Invest in DST Properties
DST properties include nearly all commercial real estate property forms, comprising multifamily and retail, and niche residential properties like elder housing, medical office, and self-storage.
DST real estate is often made up of institutional-grade assets with a high return on investment. Due to their high acquisition prices, these assets would be impossible for a regular individual investor but are available through the fractional ownership granted by a DST.
DSTs can own various properties, but they usually specialize in one sort of property. An investor can buy many DSTs to diversify across different types of properties.
The disadvantage of a Delaware Statutory Trust
Control is lost due to the DST ownership structure. The investment manager will make all investment decisions and property management decisions. This may be valuable to confident investors. The lack of control with trust management may be a problem for others.
The advantages of a Delaware Statutory Trust
The possibility to defer, minimize, or even eliminate taxes associated with the sale of investment property through a 1031 Exchange is perhaps the most compelling reason to invest in a Delaware Statutory Trust. DSTs are a popular passive real estate investment that allows you to own institutional-quality buildings while avoiding the hassles of being a landlord. As 1031 Exchange replacement properties, Delaware Statutory Trusts have various advantages.
The 1031 exchange and the Delaware Statutory Trust are both well-known investment strategies. While both concepts are pretty simple, the intricacies and implementation can be challenging. As a result, investors who use the 1031 and DST options should seek advice from real estate and tax professionals.