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Investing in Direct Ownership Real Estate as a Passive Investor – same as 1031 Tax-Deferred DST Investors

Delaware Statutory Trusts (DSTs) have earned a rightful position among 1031 exchange investors as a popular and efficient way to reinvest the proceeds from an investment property sale while deferring capital gains taxes on any property appreciation.

Many investors, however, are not aware that they can make direct cash investments into a DST without using a 1031 exchange. While this investment approach may not offer the immediate tax advantages of an exchange, there are several compelling reasons why a cash investment might make sense for certain investors.

Passive Investment Structure

Unlike most privately owned real estate investment properties, a DST is structured so that investors each own a passive interest in a property (or properties) that is professionally managed. That means the investor is not responsible for collecting rent, keeping up the property or dealing with insurance, taxes, or loan obligations.

Instead, this passive investment is designed to provide regularly scheduled income potential to the investor, without the headaches of property management.

Lower Minimum Investments

Investors interested in owning potential income-producing privately owned real estate are frequently confronted with the hard truth that it may take a large investment to own a property. Since DSTs are structured in a manner where multiple investors can participate with each owning a fractional interest, minimum investments can be as low as $50,000 for accredited investors.

Institutional Quality Real Estate

Since DSTs are permitted to have several hundred investors, the cumulative investments within a single DST can be $50,000,000 or more. This enables the sponsor to pursue and purchase large, institutional quality real estate that would generally not be available (or attainable) by a single individual investor. Higher quality real estate may provide more favorable income potential compared to lower quality properties.

Projected Monthly Cash Flow

Institutional tenants pay monthly lease payments to sponsors property managers who, after expenses, automatically deposit monthly checks to DST owners checking.

Limited Liability

It is a very common practice for investors in privately owned real estate to secure loans on their investments so that they can purchase properties of the highest value possible. But, as with any investment, risks need to be considered and default risk on a loan is always a concern, especially if tenants fall behind or are unable to make rent payments.

With DSTs, however, the properties have already been purchased and leverage already secured by the sponsor. Since the DST is the sole borrower, loans are considered non-recourse for the individual investor.

Eligible for 1031 Exchange

Since the DST structure confirms to 1031 Exchange regulations, cash investors in a DST can enjoy the same tax- deferral benefits upon the sale of the DST property. In other words, if the property has appreciated in value, the investor is permitted to use a 1031 exchange to defer any capital gains tax that would apply, by purchasing another like-kind property or investing in another DST.

Recent market volatility caused by the COVID-19 pandemic and ultimate shutdown of the economy, naturally has many investors nervous about where they should have their money invested. Publicly traded Real Estate Trusts (REITs) were not unscathed by the market downturn and it may take some time for those investments to recover in value. For investors who understand the importance of diversifying beyond just stocks and bonds, private real estate just might prove to be an effective way to do so, and if suitable, DSTs may be an attractive way to participate.

If you would like to learn more about direct cash investing in a DST, please to contact Financial Designs, Ltd at (858) 597-1980. We can also schedule a phone call, one on one meeting or an on-line Zoom at your convenience.

It is important to note that DST investing is subject to specific eligibility criteria, and only individuals who meet the definition of an accredited investor are permitted to participate.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65).  Individuals holding a Series 66 do not fall under this definition) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Before considering a DST investment, it is crucial to evaluate your eligibility as a qualified investor. Our team is committed to assisting you in this process, ensuring that you meet the necessary requirements to participate in DST opportunities. Additionally, we are here to address any questions you may have and provide detailed information to guide your investment decisions.

Please be aware that DST investments involve risks and considerations which include but are not limited to substantial fees and expenses, inability of the DST to actively manage the property, strict timing limitations and risk of not meeting requirements for 1031 exchange tax treatment, and other negative tax consequences. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, lack of liquidity with restrictions on ownership and transfer. Potential cash flow, returns and appreciation are not guaranteed and could be substantially lower than anticipated. Diversification does not guarantee profits or protection against losses.

Additional risks and considerations related to investing in 1031 DST commercial real estate include, but are not limited to, general real estate risks, financing risks, tax risks, interest rate risk, management risks, operating risk, market risks such as supply and demand, changing market demographics, tenant turnover, tenants inability to pay rent, acts of God such as earthquakes, floods or other uninsured losses. There are also potential risks relating to the trust structure and the potential for adverse changes in laws and regulations. This material is not to be interpreted as tax or legal advice.