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Cash Investments into DSTs – An Alternative to Investing in the Stock Market

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Delaware Statutory Trusts are an investment vehicle worth considering for those accredited investors doing a 1031 exchange, but what some investors don’t realize, is that you can also invest in DSTs on a cash basis. Why consider investing cash in a DST? DSTs offer many potential benefits to those doing a 1031 exchange, for example, the ability to defer their capital gains from the sale of their investment real estate as well as avoiding some of the associated risks of finding a replacement property within a tight timeline. But potential DST benefits don’t end there; there are other potential benefits that may serve investors well as an alternative to both owning real estate outright or investing in the stock market.

Potential Benefit #1: Passive, professionally managed, income

Have your money working for you – DSTs are professionally managed by asset managers and property managers, and their job includes striving to make certain that the tenants pay their rents on time and then mailing the investor a check, usually every month (assuming funds are available). As an investor, you have zero management responsibilities and never have to interact with any of the tenants. Potential Benefit #2: Diversification by real estate sector and geography It’s great to invest in one thing and have that investment do well. But what if it doesn’t? Any investment, whether it be real estate, stocks, futures, commodities, jack’s magic beans, etc… has the potential to incur losses. However, when one diversifies their portfolio by investing in multiple things, the risk is spread out. There are multiple DST real estate investments available to investors from various DST sponsors, including multifamily, storage space, office, and NNN leases. And not only can you invest in a particular type of DST, such as multifamily, you can do so in several different geographic regions of the country, so that even if one area of the country was to experience a downturn in their local economy, chances are greater that other locations do not, or at least, those odds are lessened by diversification.

Potential Benefit #3: backed by hard assets

One of the reasons that many investors love real estate is because you can’t run off with the product; it is firmly affixed to the ground. Also, real estate has an intrinsic value, meaning that fundamentally, it is a hard asset that has at least some minimal value, unlike a company where the company can go bankrupt and their stock can potentially become worthless. Of course, there is always the risk of foreclosure or an uncovered natural disaster, but, as stated above, no investment is without risk. Potential Benefit #4: historically less correlated with stock market and less volatile The stock market can be volatile, especially as we’ve seen during this recent coronavirus pandemic. Double digit market fluctuations have, on some days, been the norm. However, real estate generally has had a lower correlation to the stock market. Now, that doesn’t mean that real estate can’t also be volatile and incur a downturn like we saw during the Great Recession of 2008/2009, but it is usually far less affected by market tribulations than the equity markets. Potential Benefit #5: access to institutional real estate Real estate as an asset class has many benefits, and it is a popular way to potentially build wealth. But not all real estate is created equal. Just like there are blue-chip stocks vs “junk” bonds, so it is with real estate. There are DSTs that offer investors the ability to invest in “institutional-level” real estate, which is, generally speaking, real estate that is considered of a particular quality and class such that large institutions and major investment funds would consider it. Most individuals would have difficulty gaining access to these sorts of real estate investments by themselves, but the DST structure allows them to indirectly own a fraction of these investments which they otherwise could not. Potential Benefit #6: low minimum investment (in many instances, as low as $25,000) for accredited investors The minimum direct cash investment in a DST can often be as low as $25,000. This, for most accredited investors, is not a kingly sum, and allows them access to DST real estate assets on a fractional basis that could otherwise require millions of dollars to acquire, finance, and manage.

Potential Benefit #7: DSTs, under current IRS code, allow investors to do a 1031 exchange when the investment property is sold

When investing, for example, in stocks, investors are required to pay capital gains on any profit that they earn (note: Opportunity Zones may provide an option to defer those gains). However, under the current IRS code, once a DST asset is sold, investors have the option of completing a 1031 exchange into another property which they own 100% or another fractional DST, and thus deferring any capital gains. Of course, changes to the IRS code, such as those under President Biden’s proposed economic plan, could change the treatment of future gains if the plan is passed.

Potential Benefit #8: No personal financing approval required for cash investors

Unlike purchasing a property directly and possibly having the need to acquire the financing from a lender, DSTs offer non-recourse loans to investors that are not reliant on the investor’s ability to secure financing.

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Real Estate / 1031 Risk Disclosure:
  • There’s no guarantee any strategy will be successful or achieve investment objectives;
  • All real estate investments have the potential to lose value during the life of the investments;
  • 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;
  • All financed real estate investments have potential for foreclosure;
  • These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
  • If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
  • Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits;
  • Tax benefits are not guaranteed and are subject to changes in the tax code.