Insights Blog
Retirement Planning Strategies: Choosing Between DST and NNN Investments
Introduction
As individuals approach retirement, retirement planning strategies becomes a top priority. Real estate investors often shift their focus from active management to passive investment opportunities aimed at preserving capital and generating steady income. Among the various options available, Delaware Statutory Trusts (DST) and Triple Net Lease (NNN) properties stand out as prominent choices for retirees looking to diversify their portfolios and secure potential passive income streams.
Understanding NNN Investments and DST
What is a NNN Investment?
An absolute NNN lease stems from the responsibility of the tenant versus the landlord. Each “net” in a triple net lease generally refers to the expenses for which the tenant is responsible, including property taxes, insurance, and maintenance. These expenses are paid by the tenant in addition to the base rent. In an absolute NNN lease, the tenant is responsible for the base rent plus all associated expenses, and the landlord simply collects income from the property. Most NNN investments leveraged for retirement planning are single-tenant assets, and the strength of the tenant can vary by investment.
What is a DST?
Retirement planning strategies like an NNN investment or a DST involves investing in a trust. Investors purchase ownership interests in one or multiple assets managed by an investment sponsor. The trust can include a range of assets from multifamily properties to industrial assets or a portfolio of NNN properties. DST investors own fractional ownership and are known as “beneficiaries” of the trust, making them passive investors.
Pros and Cons of NNN Investments and DST
Diversification
Retirement planning strategies with DST offer greater diversification compared to direct NNN investments, especially when trading lower-priced assets. For example, if an investor is selling a multifamily property for $1 million, they can purchase one or two direct NNN assets as replacement properties. A DST permits diversification across multiple properties, asset classes, geographical regions, and sponsors, with minimum investments typically around $100,000.
Liquidity
One of the main drawbacks of DST investments is the absence of liquidity. The sponsor determines when to sell the asset, with typical hold periods ranging from five to seven years. Conversely, in a direct NNN property investment, the landlord determines when to sell the asset. Some DST transition through a 721 Umbrella Partnership Real Estate Investment Trust (UPREIT), providing additional liquidity options by allowing investors to own shares in a REIT.
Ownership Structure, Control, and Management Requirements
In a direct NNN investment, the investor is the decision-maker, responsible for negotiating leases and managing the property. With a DST, the sponsor manages the property, and investors remain truly passive. This difference in control can significantly impact the investor’s experience and involvement level.
Estate Planning
DST can be beneficial for estate planning. Investments in DST can be divided directly among beneficiaries, each receiving an allocated equity position in the DST, which qualifies for a stepped-up basis. This allows beneficiaries to decide independently whether to cash out or complete another 1031 exchange. In contrast, direct NNN properties may require collective decision-making among heirs.
Which Investment is Right for You?
Choosing between NNN investments and DST depends on individual financial goals, risk tolerance, and preferences for control and management. Those seeking complete passivity might lean towards DST, while those wanting some control over their assets might prefer NNN investments.
Frequently Asked Questions
What are the main benefits of NNN investments for retirees? NNN investments offer steady income with minimal landlord responsibilities, as tenants cover property expenses.
How do DST provide diversification? DST allow investors to spread their investment across multiple properties and asset classes, reducing risk.
Are DST investments liquid? DST investments are typically less liquid, with hold periods determined by the sponsor, often ranging from five to seven years.
Can DST investments be included in a 1031 exchange? Yes, both DST and NNN properties are 1031 exchange-qualified, allowing for tax-deferred exchanges.
What is the typical minimum investment for a DST? Minimum investments for DST generally start at around $100,000.
How do DST benefit estate planning? DST offer a stepped-up basis and allow for easy division among beneficiaries, providing flexibility for heirs.
Retirement planning requires careful consideration of various investment options. Both DST and NNN investments offer unique benefits and challenges. By understanding the characteristics, pros, and cons of each, retirees can make informed decisions to secure their financial future.
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.
Ehud Gersten
Perch Wealth provides you with access to institutional-quality real estate, management, financing and state of the art 1031 exchange processing.
855-DST-3443
in**@Pe*********.com
29122 Rancho Viejo Road
Suite 111
San Juan Capistrano,
California 92675
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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© 2023 Perch Wealth.
- 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.