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Why Investors Prefer Delaware Statutory Trust (DST) Properties Over NNN Properties for 1031 Exchanges

Ben Carmona
May 27, 2024

Introduction

Real estate investors often face a crucial decision when considering a 1031 exchange: choosing between Delaware Statutory Trusts (DSTs) and NNN (Triple Net Lease) properties. This decision hinges on several key factors such as diversification, tenant quality, investment stability, and transaction efficiency. In this article, we will explore these factors in detail and introduce Perch Wealth, a premier service provider that assists investors in navigating the complexities of 1031 exchanges.

Access to High-Quality Tenants

One primary consideration for investors in a 1031 exchange involving DSTs vs. NNN properties is the quality of tenants. Both DSTs and NNN properties can feature high-caliber tenants such as CVS, Starbucks, and FedEx. These tenants are renowned for their reliability and long-term lease agreements, providing a stable income stream for investors. However, DSTs may offer a broader range of tenant options within a single investment, allowing for greater tenant diversification. This reduces the risk associated with tenant default and enhances the overall stability of the investment portfolio.

Diversification Benefits

Diversification is a critical strategy for mitigating risk in real estate investment, especially in the context of a 1031 exchange into DSTs vs. NNN properties. While NNN properties offer steady income, they typically require significant capital tied up in a single property. This concentration of investment can be risky if the property faces unforeseen issues or if the tenant vacates. In contrast, DSTs allow investors to diversify their capital across multiple properties, geographic regions, and tenant types within a single DST. This approach is similar to investing in a mutual fund, where the risk is spread across various assets, reducing the impact of any single property’s underperformance.

Combining Anchor and Buoy Investments

DSTs provide a unique opportunity to blend different investment strategies within the same portfolio. Investors can combine “Anchor” investments—properties with long-term, stable leases—with “Buoy” investments—properties with shorter-term leases and potential for rental income growth. This combination offers both stability and the potential for increased income over time, balancing the portfolio to protect against inflation and market fluctuations.

Efficient 1031 Exchange Closings

One significant advantage of DSTs in a 1031 exchange is the efficiency they bring to transactions. DSTs are pre-packaged and structured to facilitate faster and more secure closings. This reduces the risks associated with financing failures, undisclosed property issues, and other potential obstacles that can arise when purchasing a single NNN property. The streamlined process ensures that investors can complete their 1031 exchanges within the required timelines, minimizing stress and uncertainty.

Introducing Perch Wealth

Perch Wealth is a leading service provider specializing in 1031 exchanges and DST investments. With a deep understanding of the real estate market and a commitment to client success, we offer comprehensive services to help investors navigate the complexities of 1031 exchanges. Our team of experts provides personalized guidance, ensuring that investors make informed decisions and optimize their investment portfolios. By partnering with Perch Wealth, investors can leverage their expertise to identify high-quality DSTs, diversify their investments, and achieve their financial goals with confidence.

Our Final Thoughts

DSTs present a compelling alternative to NNN properties for 1031 exchanges, offering diversification, efficient closings, and access to high-quality tenants. Investors can benefit from the structured approach of DST investments, which may provide stability and potential income growth. For those looking to maximize the advantages of 1031 exchanges, partnering with a trusted service provider like Perch Wealth can make all the difference. Perch Wealth’s expertise and personalized approach ensure that investors navigate the process smoothly.

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

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 Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

Ben Carmona

Ben Carmona is a Managing Partner at Perch Wealth. With over 20 years of applied experience, Ben is an expert in real estate investments, structures, and strategies.

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29122 Rancho Viejo Road
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San Juan Capistrano,
California 92675

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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 Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

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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.