Investors Graduate from being  Landlords and Utilize  DSTs

Real Estate Investors- who are they?

Real estate investors who are also land­lords gain a lot of edu­ca­tion while they own the prop­er­ty.  As the years go by the land­lord look for­ward to their grad­u­a­tion mean­ing sell­ing the prop­er­ty and grad­u­at­ing from active man­age­ment into anoth­er stage of their life. 

By Al DiNi­co­la, AIF®
Feb­ru­ary 1, 2023
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

At times it is con­fus­ing for investors answer­ing the ques­tion what is next. When you are the own­er of a sin­gle rental prop­er­ty or mul­ti­ple prop­er­ties it can be reward­ing finan­cial­ly. Nat­u­ral­ly there is a lot of respon­si­bil­i­ty attached with the own­er­ship. COVID may have added to the stress of own­ing and man­ag­ing rental prop­er­ties. Real estate investors may be in a sim­i­lar sit­u­a­tion as a busi­ness own­er who is try­ing to decide what to do when faced with sell­ing their busi­ness. In oth­er words what are the poten­tial exit strate­gies. If a real estate investor pur­chased their invest­ment prop­er­ty more than 20 years ago the option of invest­ing in a Delaware Statu­to­ry Trust (DST) was not avail­able. Real estate own­er who may be clas­si­fied as baby boomers are shift­ing their atten­tion towards an eas­i­er way of own­ing a real estate invest­ment than the stress of man­ag­ing the prop­er­ty. The process may be sim­i­lar to a land­lord grad­u­at­ing to anoth­er phase of real estate invest­ment.

The grad­u­at­ing (retir­ing) land­lords are seek­ing a method to avoid or defer tax­es on the sale of their prop­er­ty. How­ev­er, the land­lord may want to tran­si­tion to a dif­fer­ent style investor with a stream of income on a reg­u­lar basis but not with the man­age­ment respon­si­bil­i­ties. DSTs are for accred­it­ed investors and pro­vide an easy tran­si­tion (through a 1031 exchange) enabling the investor to pool resources with oth­er investors. The investors may acquire a sin­gle asset prop­er­ty or a port­fo­lio of assets/properties. Pri­or to DST gain­ing in pop­u­lar­i­ty, Ten­ants in Com­mon (TICs) were the pre­ferred invest­ment vehi­cle. The IRS ruled the DST legal enti­ty pro­vides an investor in DST an accept­able alter­na­tive for a 1031 tax deferred exchange as a replace­ment prop­er­ty.

Many investors may not ful­ly under­stand their exit strate­gies with respects to their invest­ment prop­er­ties. If an investor wish­es to retire from active man­age­ment their alter­na­tive may be to sim­ply sell, pay their cap­i­tal gains and invest the pro­ceeds into anoth­er invest­ment. Sur­veys of busi­ness own­ers have demon­strat­ed that 76% of busi­ness own­ers do not know or under­stand their exit options on sell­ing their busi­ness. Real estate investors may be in the same posi­tion think­ing their only option is to attempt to do a 1031 exchange into anoth­er tra­di­tion­al real estate invest­ment. Investors (as well as busi­ness own­ers) are con­cerned with defer­ral of tax­es and retain­ing as much finan­cial posi­tion­ing as pos­si­ble. DSTs could be the per­fect solu­tion for real estate own­ers look­ing to defer cap­i­tal gains tax­es and at the same time elim­i­nate the respon­si­bil­i­ty of man­ag­ing the real estate invest­ment. What may sound like a sil­ly state­ment, investor no longer want to deal with ten­ants, toi­lets or trash. Grad­u­at­ing from the land­lord stage into what is next is the ques­tion.

Here are a few rea­sons to grad­u­ate from being a land­lord into a pas­sive investor uti­liz­ing a DST.

DSTs are eli­gi­ble as replace­ment prop­er­ties when using a 1031 Tax Deferred Exchange.

As men­tioned pre­vi­ous­ly 20 years ago DSTs were not uti­lized in a 1031 exchange. Once the IRS in the 2004–86 rul­ing cleared the way to use a DST for invest­ing there has con­tin­ued to be a surge of inter­est. All of the same advan­tages of a 1031 exchange using tra­di­tion­al real estate are avail­able when using a DST. This includes the abil­i­ty to defer 30%- 40% of your sales pro­ceeds as cap­i­tal gains tax­es upon the sale of your invest­ment real estate. The DST pro­vides a ben­e­fi­cial inter­est (frac­tion­al inter­est) that sat­is­fies the “like kind” require­ment of the 1031 exchange. The surge in DST invest­ment can be seen by reflect­ing on the past few years of acqui­si­tions. In 2019 there was $3.3 bil­lion invest­ed in DSTs; in 2020 there was $3.5 bil­lion invest­ed. 2021 had a record $7.6 bil­lion of equi­ty invest­ed. Based on pre­lim­i­nary reports 2022 may pro­duce $10 bil­lion in equi­ty invest­ed into DSTs. Since DST are avail­able to cash investors as well as 1031 exchange investor not all the invest­ments were made via 1031 vehi­cle. How­ev­er, the major­i­ty of the equi­ty came from 1031 exchanges.

Mul­ti­ple asset class­es and loca­tions can lead to a diver­si­fied port­fo­lio.

There is a dis­tinct advan­tage of invest­ing in a DST based on the vari­ety of asset class­es as well as geo­graph­ic loca­tion. The same tra­di­tion­al com­mer­cial asset class­es exist in DST offer­ings. Mul­ti­fam­i­ly, Stu­dent hous­ing, senior hous­ing, man­u­fac­tured hous­ing, indus­tri­al, self-stor­age, retail, office all may be offered as DSTs. A land­lord grad­u­at­ing from own­ing a $500,000 res­i­den­tial rental prop­er­ty may be in a posi­tion to acquire three to four DST in any of the asset class­es men­tioned. Depend­ing on the spe­cif­ic time the investor is ready to invest, the loca­tions of the offer­ing or assets may change pro­vid­ing the investor with poten­tial of geo­graph­ic diver­si­fi­ca­tion.

The bar­ri­er to entry is also low­er in a DST than tra­di­tion­al real estate.

We had an investor who sold a $525,000 prop­er­ty and invest­ed into four DST locat­ed in Texas, Flori­da, and Geor­gia. Since this is tech­ni­cal­ly an invest­ment in a secu­ri­ty, pur­chasers need to be accred­it­ed investors. The min­i­mum invest­ment for cash investors may be as low as $25,000. Typ­i­cal­ly, 1031 investors have a min­i­mum of $100,000. There is also a pri­vate place­ment mem­o­ran­dum (PPM) that accom­pa­ny the acqui­si­tion.

Oh, what a relief- no more prop­er­ty man­age­ment.
For those of us who have been down the road of own­ing real estate as an invest­ment when there is a ten­ant involved, there comes a day when we are ready to grad­u­ate to some­thing less stress­ful. Regard­less if you engage a prop­er­ty man­ag­er there is the ongo­ing con­cerns of prop­er­ty main­te­nance and man­age­ment. The nature of the DST is a pas­sive invest­ment, and the spon­sor (through the mas­ter ten­ant) han­dles all the run­ning of the prop­er­ty. It is worth repeat­ing investors no longer deal with ten­ants, toi­lets & trash. Spon­sors also han­dle iden­ti­fy­ing the prop­er­ties and in the case of a lever­aged prop­er­ty arrange the financ­ing for acqui­si­tion. Of spe­cial note is for the investor who relin­quish a prop­er­ty and pay off debt (mort­gage or loan) there is a 1031 exchange require­ment to replace the debt on the replace­ment prop­er­ty. DST (that have lever­age) come prepack­age with non-recourse debt.

CPR for 1031 exchanges

Over the years we have tak­en numer­ous calls from investors who hypo­thet­i­cal­ly are grasp­ing for air or at least a back­up solu­tion. A DST Can Pro­vide Relief. The IRS has no exten­sion for the 45-day (from the clos­ing on the relin­quished prop­er­ty) iden­ti­fi­ca­tion peri­od or the total 180 days (from same clos­ing) to close on the replace­ment prop­er­ty. Investors are chal­lenged late­ly to find the replace­ment prop­er­ty that will check all the box­es with­in the 45-day iden­ti­fi­ca­tion peri­od. The investor may want to have inspec­tions, con­duct due dili­gence, arrange financ­ing and a host of oth­er actions which not only cre­ates stress but exceeds the 45-day peri­od. We have been for­tu­nate to assist investors who were in the final days of their 45-day iden­ti­fi­ca­tion peri­od and used sev­er­al DSTs as a back­up plan. In one exam­ple an investor was engaged in nego­ti­a­tions with three dif­fer­ent prop­er­ties and iden­ti­fied two DST as back­ups. In anoth­er real-life exam­ple, an investor had been search­ing with their real estate agent pri­or to the relin­quished prop­er­ty going under con­tract and dur­ing the 45-day peri­od to locate suit­able replace­ment prop­er­ties. With 5 days remain­ing in the iden­ti­fi­ca­tion peri­od and work­ing with the investor’s CPA and QI we were able to locate and iden­ti­fy a vari­ety of DSTs for poten­tial acqui­si­tion. With­in a few weeks the investor closed on a port­fo­lio of six DSTs that includ­ed three asset class­es in four dif­fer­ent states pro­vid­ing a back up plan as well as diver­si­fi­ca­tion.

Pack­ag­ing may be the key.

The advan­tage the DST option has is the way the spon­sor pack­ages the offer­ings. DSTs as a back­up work real­ly well for a short peri­od of time. The real ben­e­fit for the DST revolves around the 45-day peri­od. If your con­tracts for replace­ment prop­er­ties are in jeop­ardy around the45-day peri­od than a DST maybe a great back up plan. Once a DST is iden­ti­fied the clos­ing date for the DST hap­pens in a mat­ter of a week and sure­ly not 180 days. The very nature of the DST offer­ings are the offer­ings are able to be acquired quick­ly and will not drag on for 180 days. This is good news for the investor. The QI will not be hold­ing your invest­ment pro­ceeds and your invest­ment dol­lars will be work­ing for them soon­er.

Ready to respond.

Finan­cial advi­sors who spe­cial­ize in 1031 exchanges and DST offer­ings may be in the best posi­tion to assist with your ques­tions and edu­ca­tion. We track all the major spon­sors of DSTs on a week­ly basis and inter­act with the spon­sors. We are ready to assist you the land­lord who may be seek­ing to grad­u­ate to anoth­er style of invest­ing.

Keep up with oth­er top­ics on https://dstnews.org/

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin- Sher­wood Rd, Suite 200, Tualatin, OR 97062 MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.
Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC