Why Consider a DST Investment?
If you are a real estate investor, you've probably heard about the DST (Delaware Statutory Trust). A DST investment is an excellent choice for 1031 real estate investors who want to invest in commercial and institutional-grade properties that they can't afford to invest in alone.
Direct real estate can be an excellent investment. However, it can also be a huge liability and time commitment, especially with the amount of hands-on work it requires. Investing in commercial real estate is a fantastic way for investors to profit and diversify their portfolios, but investments like these are typically too expensive for individual investors. Many variables need consideration, and what might seem like a simple investment could have unexpected implications.
However, DSTs make it possible for investors to access and invest in high-profile commercial real estate. DST investments are offered by sponsors who professionally manage a portfolio of properties for the passive or "fractional" investor.
The commercial real estate market presents a unique set of challenges for many investors. To help investors navigate this landscape, we've created a guide that contains the necessary information about DSTs and how you can benefit from them.
What is a DST (Delaware Statutory Trust)?
A DST (Delaware Statutory Trust) is a property ownership arrangement in which several investors each possess uncontested fractional shares in the trust's assets. According to the regulations of Delaware trust law, DSTs are legal entities.
A seasoned real estate firm, known as the sponsor, is in charge of finding and acquiring the property portfolio before establishing the Trust. The money that the DST sponsor used to purchase the building gets replaced as investors make investments through 1031 exchanges, and ultimately the investors will own the property outright as the investors beneficially own the Trust.
This indicates that investors possess a portion of the property and that no one entity owns any property component. They qualify for 1031 exchanges when the investment is made and sold because the IRS recognizes each investor's holdings as actual ownership rights.
How Do Delaware Statutory Trusts Operate?
Delaware Statutory Trusts are investment vehicles, similar to LLCs or limited partnerships that investors use to own a fraction of a commercial or high-caliber property. Simply put, a DST sponsor combines money from beneficiaries (usually accredited investors to invest in real estate).
The DST sponsor will have already purchased the commercial assets with its own money and created a trust to hold them. Every investor acquires a pro-rata portion of ownership in a DST by investing in it. This continues until each fractional investor owns the property that the DST initially purchased.
A person must be an accredited investor and be able to meet the typical $100,000 minimum investment required to become a DST beneficiary.
DST investments give investors access to:
The usual hold period for DST investments lasts between 5 and 7 years, though many DSTs have different time horizons. Additionally, investors may be eligible for monthly or quarterly cash flow throughout this period. The investors will get their proportionate share of the sales profits and any profits from future appreciation upon selling the property.
Expand Your Portfolio with High-Caliber Commercial Real Estate
Investors in the past needed professional experience, a strong network, and access to significant quantities of funds. These prospects were once only accessible to hedge funds, investment professionals, and the super-wealthy. However, now any Accredited Investor can benefit from such opportunities.
BV Capital promises attention to detail, experience, and expertise to generate wealth for accredited investors who partner with us. You can eliminate the hassles associated with direct asset ownership while owning a fraction of institutional-grade properties.
How Do Delaware Statutory Trusts Operate?
Delaware Statutory Trusts are investment vehicles, similar to LLCs or limited partnerships that investors use to own a fraction of a commercial or high-caliber property. Simply put, a DST sponsor combines money from beneficiaries (usually accredited investors to invest in real estate).
The DST sponsor will have already purchased the commercial assets with its own money and created a trust to hold them. Every investor acquires a pro-rata portion of ownership in a DST by investing in it. This continues until each fractional investor owns the property that the DST initially purchased.
A person must be an accredited investor and be able to meet the typical $100,000 minimum investment required to become a DST beneficiary.
DST investments give investors access to:
The usual hold period for DST investments lasts between 5 and 7 years, though many DSTs have different time horizons. Additionally, investors may be eligible for monthly or quarterly cash flow throughout this period. The investors will get their proportionate share of the sales profits and any profits from future appreciation upon selling the property.
Expand Your Portfolio with High-Caliber Commercial Real Estate
Investors in the past needed professional experience, a strong network, and access to significant quantities of funds. These prospects were once only accessible to hedge funds, investment professionals, and the super-wealthy. However, now any Accredited Investor can benefit from such opportunities.
BV Capital promises attention to detail, experience, and expertise to generate wealth for accredited investors who partner with us. You can eliminate the hassles associated with direct asset ownership while owning a fraction of institutional-grade properties.
How DSTs Work With 1031 Exchanges
The IRS-approved arrangement known as a 1031 exchange enables real estate investors to defer paying taxes (including capital gains taxes, state income tax and depreciation recapture on the transfer of rental property). DSTs are qualified for 1031 exchanges because, in the eyes of the tax code, they qualify as direct property ownership.
For a DST to qualify for a 1031 exchange, the sale profits of the transferred property must get invested into a like-kind replacement property of comparable or superior value. T his is accomplished through a Qualified Intermediary who will hold the funds in escrow and document the process. To defer tax, investors must ID a replacement property within 45 days and complete this transaction within 180 days of the old property's closing date.
Tax deferral enables DST investors to keep the equity from the property sale, allowing them to use it to their advantage in their new DST property.
What Makes DSTs a Good 1031 Exchange Option?
Using Internal Revenue Code Section 1031 to your advantage can effectively increase your ROI in real estate. While investors have traditionally used real estate to expand their portfolios, DSTs offer a passive and more streamlined and flexible approach to the same end.
Compliant with 1031 Exchanges
Every investor in a DST has a stake in the trust through their ownership interests. A 1031 exchange is possible because the IRS considers the DST investor's ownership of the security equity share ownership.
The IRS issued Revenue Ruling 2004-86 in 2004, allowing the use of a DST to purchase the property. The IRC Section 1031 recognizes each beneficiary in the trust as having a personal stake in the new property.
Professional Assistance
DST investments provide a unique opportunity for passive income from real estate investments. In a DST, property investment managers with extensive knowledge oversee the property portfolio on the investors' behalf.
Investors can earn genuinely passive income from DSTs since they aren't in charge of overseeing the project freeing them up to spend their time on what they choose.
The Benefits and Drawbacks of DST Investments
DSTs are a popular investment strategy, and for a good reason. They provide numerous benefits that make them an excellent investment option for 1031 investors, but DSTs aren't without their flaws.
How do you know which investments are suitable for you? We'll cover the benefits and drawbacks of DST investments to help you decide if DSTs are suitable for you.
The Benefits and Drawbacks of DST Investments
DSTs are a popular investment strategy, and for a good reason. They provide numerous benefits that make them an excellent investment option for 1031 investors, but DSTs aren't without their flaws.
How do you know which investments are suitable for you? We'll cover the benefits and drawbacks of DST investments to help you decide if DSTs are suitable for you.
Benefits
Drawbacks
Benefits
Drawbacks
The Benefits of Delaware Statutory Trusts
Access to Class A Properties
While DSTs typically can own any type or class of real property, most assets they hold are of institutional standard. DSTs include many common commercial real estate properties such as multifamily, office, industrial and medical properties. They can even include A-list homes in affluent secondary markets and properties in significant urban regions.
Great Timing for 1031 Exchanges
Timing is a crucial factor for conducting 1031 exchanges. Investors have only 45 days after closing the sale of their surrendered assets to designate like-kind properties formally. It can be challenging to identify the right property in a lucrative market in time, which is one reason DSTs are highly attractive to 1031 exchange investors.
DST sponsors provide a pre-packaged investment vehicle with low transactional risks. The sponsors handle assessments, accounting records, due diligence, environmental reports, and leases before they ever ask passive investors to pool their funds together. Consequently, exchange investors can do their due diligence immediately and satisfy the 45-day ID deadline and the 180 days required by the 1031 exchange laws.
Supports Estate Planning
DST investors can transfer their valuable ownership stake into the Trust in favor of their beneficiaries after investing the proceeds of a property sale into the DST. The real estate holdings kept in that trust acquire a stepped-up basis at the owner's death, which means that the property's value is calculated based on the owner's death date instead of the value at its initial purchase.
Pre-packaged Securities
It is reasonably easy for investors to employ 1031 exchange money to buy one or more partial DST investments because funding and complete due diligence are in place, allowing for quick closure.
Diversity of Risks
The minimum investment amount for DSTs is typically $100,000. Therefore, accredited real estate investors can distribute their risk by working with various DST sponsors, different property types, and different geographic locations. You can invest $100,000 or more in a DST deal that focuses on industrial or retail properties and another $100,000 or more in another DST that focuses on multifamily or office buildings.
Passive Investment
DST investments provide a unique opportunity for passive income from real estate investments. In a DST, property investment managers with extensive knowledge oversee the property portfolio on the investors' behalf. Investors can earn genuinely passive income from DSTs since they aren't in charge of overseeing the project freeing them up to spend their time on what they choose.
Limited Liability
The DST structure protects investors from personal obligations that go beyond their investment.
Direct Property Ownership
Investing in DSTs has similar tax advantages to sole ownership, such as interest expense and asset depreciation.
The Benefits of Delaware Statutory Trusts
Access to Class A Properties
While DSTs typically can own any type or class of real property, most assets they hold are of institutional standard. DSTs include many common commercial real estate properties such as multifamily, office, industrial and medical properties. They can even include A-list homes in affluent secondary markets and properties in significant urban regions.
Great Timing for 1031 Exchanges
Timing is a crucial factor for conducting 1031 exchanges. Investors have only 45 days after closing the sale of their surrendered assets to designate like-kind properties formally. It can be challenging to identify the right property in a lucrative market in time, which is one reason DSTs are highly attractive to 1031 exchange investors.
DST sponsors provide a pre-packaged investment vehicle with low transactional risks. The sponsors handle assessments, accounting records, due diligence, environmental reports, and leases before they ever ask passive investors to pool their funds together. Consequently, exchange investors can do their due diligence immediately and satisfy the 45-day ID deadline and the 180 days required by the 1031 exchange laws.
Supports Estate Planning
DST investors can transfer their valuable ownership stake into the Trust in favor of their beneficiaries after investing the proceeds of a property sale into the DST. The real estate holdings kept in that trust acquire a stepped-up basis at the owner's death, which means that the property's value is calculated based on the owner's death date instead of the value at its initial purchase.
Pre-packaged Securities
It is reasonably easy for investors to employ 1031 exchange money to buy one or more partial DST investments because funding and complete due diligence are in place, allowing for quick closure.
Diversity of Risks
The minimum investment amount for DSTs is typically $100,000. Therefore, accredited real estate investors can distribute their risk by working with various DST sponsors, different property types, and different geographic locations. You can invest $100,000 or more in a DST deal that focuses on industrial or retail properties and another $100,000 or more in another DST that focuses on multifamily or office buildings.
Passive Investment
DST investments provide a unique opportunity for passive income from real estate investments. In a DST, property investment managers with extensive knowledge oversee the property portfolio on the investors' behalf. Investors can earn genuinely passive income from DSTs since they aren't in charge of overseeing the project freeing them up to spend their time on what they choose.
Direct Property Ownership
Investing in DSTs has similar tax advantages to sole ownership, such as interest expense and asset depreciation.
Limited Liability
The DST structure protects investors from personal obligations that go beyond their investment.
The Downfalls of Delaware Statutory Trusts
Fees
DST investing fees are frequently imposed upfront and once more at the sale. Selling charges, broker-dealer allowances, offering and coordination costs, capital financing, and sale fees, among other things, are some examples of fees in a DST deal.
Illiquidity
DSTs are highly illiquid investments because of their extensive investment horizon, typically between five and ten years. The DST offering's growth cycle will likely have your capital tied up. Thus, only those investors who can bear having their investment held up for 5-7 years should consider investing in DSTs.
Limited Early Termination Options
Since there is no open market for divestment like there is for shares or other instruments, it can be very challenging to sell shares of a DST before the whole term of the deal.
Additionally, DSTs frequently impose limitations on the transfer of equitable interests, so you might need to obtain consent from the DST sponsor. Lastly, divestiture must adhere to securities rules because DST interests are considered private.
Absence of control
The DST business model may frustrate investors looking for hands-on opportunities where they can use their expertise to drive up asset valuations or lease rates.
DSTs are usually undertaken assets, and DST sponsors make all daily and critical operational decisions whereas passive investors have no input. You should ensure those factors are consistent with your financial beliefs.
The Downfalls of Delaware Statutory Trusts
Fees
DST investing fees are frequently imposed upfront and once more at the sale. Selling charges, broker-dealer allowances, offering and coordination costs, capital financing, and sale fees, among other things, are some examples of fees in a DST deal.
Illiquidity
DSTs are highly illiquid investments because of their extensive investment horizon, typically between five and ten years. The DST offering's growth cycle will likely have your capital tied up. Thus, only those investors who can bear having their investment held up for 5-7 years should consider investing in DSTs.
Absence of control
The DST business model may frustrate investors looking for hands-on opportunities where they can use their expertise to drive up asset valuations or lease rates.
DSTs are usually undertaken assets, and DST sponsors make all daily and critical operational decisions whereas passive investors have no input. You should ensure those factors are consistent with your financial beliefs.
Limited Early Termination Options
Since there is no open market for divestment like there is for shares or other instruments, it can be very challenging to sell shares of a DST before the whole term of the deal.
Additionally, DSTs frequently impose limitations on the transfer of equitable interests, so you might need to obtain consent from the DST sponsor. Lastly, divestiture must adhere to securities rules because DST interests are considered private.
Fees Associated With DSTs
A DST must pay many underwriting and administrative fees when purchasing property and setting up the trust, just like other real estate investments. At the time of the offering, these expenses get repaid to DST sponsors as they were paid by the Sponsor initially.
Listed are some of the most typical fees associated with a DST:
The sponsoring entity can not take part in any potential appreciation of the Trust's property investment(s) upon sale, according to the IRS-mandated structure for DSTs. Therefore, in addition to the purchase and development fees, DST sponsors may also be qualified for a share of the properties' continued cumulative operating revenue.
Who Can Invest in DSTs?
DSTs are specialized investments, and to participate in one, you need to be an accredited investor. According to the SEC, an accredited investor has $1,000,000 in assets (excluding their principal residence); or an average yearly income of more than $200,000 for the previous two years, whichever is higher; or $300,000 for a married couple filing together.
Finding DST Properties
Finding a DST could be the biggest obstacle when it comes to investing in one. Due to SEC guidelines, sponsors are limited in how they promote some DST investments to the general public. However, DST sponsors provide accredited investors with the opportunity to invest in high-profile properties by directly collaborating with brokers and 1031 experts.
The screening, purchase, and management of the properties included in each Delaware Statutory Trust are the responsibility of real estate companies referred to as DST sponsors. After purchasing the DST property, various parties conduct due diligence on the real estate and trust arrangement.
The sponsors arrange the DST deal for investors and advertise it through authorized broker dealers and RIAs who hold the required brokerage licenses to conduct DST sales on behalf of customers.
Diversify your Investment Portfolio with Private Real Estate
To keep your money growing long-term, you need to diversify your investments. And what better way to diversify your portfolio than investing in institutional-quality properties with no ongoing investor responsibilities.
At BV Capital, we provide a unique opportunity for accredited investors to invest in historically-unavailable A-list real estate. Our partner broker dealer firms carefully assess all DST sponsors and offerings ensure the investment possibilities offered align with our investor's goals.
Diversify your Investment Portfolio with Private Real Estate
To keep your money growing long-term, you need to diversify your investments. And what better way to diversify your portfolio than investing in institutional-quality properties with no ongoing investor responsibilities.
At BV Capital, we provide a unique opportunity for accredited investors to invest in historically-unavailable A-list real estate. Our partner broker dealer firms carefully assess all DST sponsors and offerings ensure the investment possibilities offered align with our investor's goals.