The Use of Cash and DSTs — Part 1

This is part 1 of a two-part series.  (This is tak­en from an upcom­ing book DST Wealth Build­ing DiNi­co­la & McIn­tyre) DST WEALTH BUILDING

May 1, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

In the new book DST Wealth Build­ing (to be released on Ama­zon May 10, 2024 DST WEALTH BUILDING) there is a dis­cus­sion regard­ing why real estate has been and is a great asset class to invest in his­tor­i­cal­ly.  Also addressed why Delaware Statu­to­ry Trusts (DST) are poten­tial­ly a great invest­ment vehi­cle for those accred­it­ed investors doing a §1031 or §1033 exchange. How­ev­er, what some accred­it­ed investors don’t real­ize is that you can also invest in DSTs on a cash basis. The read­er will under­stand that DSTs offer many 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 DST ben­e­fits don’t end there; there are oth­er ben­e­fits that serve cash investors well as an alter­na­tive to both own­ing real estate out­right or invest­ing in the stock mar­ket.

But for those investors who cur­rent­ly do not own real estate as an invest­ment as “real prop­er­ty” due to cost, or oth­er issues, DSTs offer a way to own com­mer­cial grade real estate with all of its tax advan­tages plus thus abil­i­ty not to be respon­si­ble for obtain­ing the loan to finance it.

Here are rea­sons to con­sid­er own­ing DSTs in a port­fo­lio as an invest­ment, for cash investors, beyond hav­ing any cur­rent need for a §1031 or §1033.

Infla­tion Hedge
When infla­tion is ris­ing, investors have long relied upon real estate to pro­tect their port­fo­lios. How­ev­er, the cur­rent peri­od of high infla­tion makes real estate even more impor­tant than usu­al.

Here’s why, even though our econ­o­my shows some signs of recov­ery, the cur­rent high demand ver­sus short sup­ply con­tin­ues to plague growth and no one can pre­dict when sup­ply chains will ful­ly recov­er.  As an investor, a wise way to avoid neg­a­tive impact on your port­fo­lio is to include assets that are con­sid­ered a hedge, like real estate. A hedge is intend­ed as a just-in-case option that can poten­tial­ly min­i­mize loss­es dur­ing peri­ods of infla­tion.  Asset class­es that are his­tor­i­cal­ly rec­og­nized as good hedges against infla­tion include some types of bonds, gold, com­modi­ties and of course, real estate.

Rea­sons Why Real Estate is Great Hedge
Here are three rea­sons why real estate is typ­i­cal­ly con­sid­ered to be a good hedge against infla­tion.

1. Prop­er­ty val­ues can poten­tial­ly rise while fixed-rate mort­gages remain unchanged. Dur­ing peri­ods of infla­tion, a home­’s price gen­er­al­ly ris­es over time and the loan-to-val­ue ratio of mort­gage debt falls. As a result, the equi­ty on the prop­er­ty increas­es while your fixed-rate mort­gage pay­ments remain the same.
2. Short-term lease rental prop­er­ties can ben­e­fit from infla­tion. When a real estate investor is able to raise rents while keep­ing the mort­gage rate the same, this cre­ates an oppor­tu­ni­ty for increased income poten­tial. The more short-term lease rental prop­er­ties, the more oppor­tu­ni­ties you have.
3. Prop­er­ty val­ues over time his­tor­i­cal­ly tend to remain on a steady upward curve. This can also pro­vide a poten­tial reoc­cur­ring income for real estate investors and can main­tain the pace or even exceed the infla­tion rate in terms of appre­ci­a­tion.

One of the best ways an investor can uti­lize real estate as a hedge is to invest in a mul­ti-fam­i­ly prop­er­ty such as an apart­ment com­plex. Typ­i­cal­ly, with a mul­ti-fam­i­ly prop­er­ty, the ten­ants renew their leas­es indi­vid­u­al­ly once a year and the more units a build­ing has, the more fre­quent­ly the investor is grant­ed ample oppor­tu­ni­ties to adjust the rent, plus mul­ti-fam­i­ly prop­er­ties are always high in demand espe­cial­ly when hous­ing prices soar.

Not all investors can or even want to own and man­age an invest­ment prop­er­ty them­selves. In these cas­es, investors can still ben­e­fit from using real estate as a hedge by con­sid­er­ing real estate invest­ment trusts or REITs, insti­tu­tion­al real estate funds and Delaware Statu­to­ry Trusts that are also known as DSTs.

Real estate invest­ing is often rec­og­nized as a path toward poten­tial sav­ings preser­va­tions in an infla­tion­ary and unpre­dictable econ­o­my. Regard­less of the eco­nom­ic sit­u­a­tion, hous­ing may con­tin­ue to be in high demand, and this means it will have the poten­tial for the orig­i­nal invest­ment to grow into some­thing more sub­stan­tial down the road.

DSTs as a Port­fo­lio Solu­tion
Delaware Statu­to­ry Trusts (DSTs) pro­vide port­fo­lio diver­si­fi­ca­tion by being avail­able in mul­ti­ple DST real estate invest­ments, which are avail­able to accred­it­ed investors only. DSTs may vary based on spon­sors and asset types includ­ing mul­ti-fam­i­ly prop­er­ties, man­u­fac­tured hous­ing, self-stor­age spaces and triple net leas­es to name a few.

Tan­gi­ble Assets vs. Paper Assets:
Cash invest­ments in DSTs grant investors own­er­ship of tan­gi­ble, income-pro­duc­ing assets with intrin­sic val­ue. Unlike tra­di­tion­al invest­ments often com­pris­ing paper assets such as stocks and bonds, DST invest­ments offer direct own­er­ship inter­ests in real estate prop­er­ties. Tan­gi­ble assets offer sev­er­al advan­tages, includ­ing infla­tion pro­tec­tion, asset diver­si­fi­ca­tion, and poten­tial tax ben­e­fits such as depre­ci­a­tion deduc­tions and cap­i­tal gains treat­ment. Addi­tion­al­ly, real estate prop­er­ties pos­sess inher­ent util­i­ty val­ue and can be lever­aged for addi­tion­al income gen­er­a­tion through rental income, lease agree­ments, and prop­er­ty devel­op­ment.

Diver­si­fi­ca­tion
Not only can you invest in a par­tic­u­lar DST asset class, but you can also 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 than the oth­er loca­tions do not or at least those odds are less­ened by diver­si­fi­ca­tion.

Diver­si­fi­ca­tion is a great way to help mit­i­gate the risks often asso­ci­at­ed with direct­ly own­ing one sin­gle prop­er­ty. Investors can avoid plac­ing all their eggs in one bas­ket by invest­ing in mul­ti­ple DST prop­er­ties.

With DSTs an investor can eas­i­ly diver­si­fy their hold­ings by real estate sec­tor and geog­ra­phy.  Any invest­ment, whether it be real estate, stocks, futures, com­modi­ties, etc. has the poten­tial to incur loss­es. How­ev­er, when one diver­si­fies their port­fo­lio by invest­ing in mul­ti­ple areas, 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.

Pas­sive Income & Pro­fes­sion­al Man­age­ment
DSTs are pro­fes­sion­al­ly man­aged by asset man­agers and prop­er­ty man­agers, and their job includes mak­ing cer­tain that the ten­ants pay their rents on time and then mail­ing the investor a check, usu­al­ly every month. As a DST investor, you have zero man­age­ment respon­si­bil­i­ties and nev­er have to inter­act with any of the ten­ants.

Real estate invest­ments are often a great way to earn high­er-than-aver­age returns while also diver­si­fy­ing your port­fo­lio. Some sug­gest real estate invest­ing, when done appro­pri­ate­ly, is the high­est-earn­ing asset class a port­fo­lio can have, while the investor earns pas­sive income. This is one of the best rea­sons to invest cash in a DST is its pas­sive income. With a DST, the prop­er­ty man­ag­er or spon­sor does the heavy lift­ing. Pas­sive income is nor­mal­ly the goal of any true real estate investor.

Low­er Invest­ment Risk
Real estate invest­ing is safer than stock invest­ing as the invest­ment is secured by the asset itself — the build­ing. Rarely will you see your invest­ment lose val­ue and if so, it’s usu­al­ly only for a short peri­od of time. Unlike fiat cur­ren­cies like the dol­lar, real estate doesn’t lose val­ue to infla­tion year after year — it per­forms bet­ter. Smart investors can even set them­selves up well in down mar­kets by buy­ing val­ue-add assets such as many did after the hous­ing bub­ble burst in 2008.

Access to Insti­tu­tion­al Real Estate 
Most DSTs 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 own a frac­tion of these invest­ments which they oth­er­wise could not.

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