The Use of Cash and DSTs — Part 2

This is part 2 of a two-part series.  (This is tak­en from an upcom­ing book DST Wealth Build­ing DiNi­co­la & McIn­tyre avail­able on Ama­zon May 10, 2024 DST WEALTH BUILDING )

May 5, 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 Part 1 of The Use of Cash and DSTs we reviewed some of the ben­e­fits of DST.  Part 1 cov­ered infla­tion hedge, cre­at­ing a port­fo­lio, tan­gi­ble asst vs. paper assets, diver­si­fi­ca­tion, pas­sive income & pas­sive man­age­ment. low­er invest­ment risk and access to insti­tu­tion­al real estate. The rea­sons con­tin­ue for accred­it­ed investors to con­sid­er using cash in a DST invest­ment vehi­cle.

Eas­i­er Entry Point.
With DSTs, cash investors have a low min­i­mum invest­ment thresh­old typ­i­cal­ly at ($25,000) but again for Accred­it­ed Investors only.  The usu­al min­i­mum direct cash invest­ment in a DST is $25,000 which for most accred­it­ed investors, is not a king­ly sum, and allows them access to many DST real estate assets on a frac­tion­al basis that could oth­er­wise require mil­lions of dol­lars to acquire, finance, and man­age.

Mul­ti­ple Spon­sors to Choose
In today’s dig­i­tal-savvy world, it has nev­er been eas­i­er to invest in real estate. With DST Spon­sor syn­di­ca­tion groups intro­duc­ing new and inno­v­a­tive ways to invest in all kinds of prop­er­ty, like through DSTs, you can own real estate such as such as mul­ti­fam­i­ly apart­ments, self-stor­age, hos­pi­tal­i­ty, retail and the likes, you’ll have plen­ty of options to choose from in this invest­ment class.

Sev­er­al Appre­ci­a­tion Avenues
With real estate invest­ing, your assets not only appre­ci­ate nat­u­ral­ly with the mar­ket, but you can also force appre­ci­a­tion. Think of it like this: Nat­ur­al appre­ci­a­tion occurs over time as the gen­er­al mar­ket for real estate inflates. Forced appre­ci­a­tion is the rev­enue that can be made from the mon­ey you put in. New win­dows? That’ll bring in val­ue. Just got the roof re-done or ren­o­vat­ed some inte­ri­ors? That rais­es your sell­ing price, too. The rea­son for this is as you ren­o­vate, you can increase the rent and the increase in rents forces the val­ue up. There are many things you can do to force the appre­ci­a­tion of your prop­er­ty, and this can make real estate invest­ing a real cash cow.

Less Cor­re­la­tion with Stock Mar­ket
Invest­ing cash in a DST result in less cor­re­la­tion with the stock mar­ket, lead­ing to less volatil­i­ty over­all.   The stock mar­ket can be volatile, espe­cial­ly as we’ve seen dur­ing this recent coro­n­avirus pan­dem­ic. Dou­ble dig­it mar­ket fluc­tu­a­tions have, on some days, been the norm. How­ev­er, real estate gen­er­al­ly has a low­er cor­re­la­tion to the stock mar­ket. Now, that doesn’t mean that real estate can’t also be volatile and incur a down­turn like we saw dur­ing the Great Reces­sion of 2008/2009, but it is usu­al­ly far less affect­ed by mar­ket tribu­la­tions than the equi­ty mar­kets.

Cre­ates Intrin­sic Val­ue
Because DSTs are backed by hard assets, this pro­vides one of the rea­sons why many investors love real estate, which is you can’t run off with the prod­uct; it is firm­ly affixed to the ground. This gives the invest­ment an intrin­sic val­ue, mean­ing that fun­da­men­tal­ly, it is a hard asset that has at least some min­i­mal val­ue, unlike a com­pa­ny where the com­pa­ny can go bank­rupt, and their stock can poten­tial­ly become worth­less.

Pay few­er tax­es.
The gov­ern­ment loves real estate investors. This is because they devel­op soci­ety by devel­op­ing land for the pub­lic. Because of this, they tend to look favor­ably toward real estate investors come tax sea­son.

Here are a few of the breaks you can expect in a DST invest­ment:

• Prop­er­ty tax deduc­tions
• Trav­el costs asso­ci­at­ed with your invest­ment.
• Cost of repairs and main­te­nance
• Depre­ci­a­tion deduction/Cost seg­re­ga­tion study
• Legal and man­age­ment ser­vices deduc­tions

No debt issues.
Banks are nice to real estate investors, too. As long as you have reli­able cred­it, a con­sis­tent job, some expe­ri­ence or a qual­i­fied spon­sor, you can expect to get a loan from the bank, often at a rea­son­able inter­est rate. But with a DST, all of this is han­dled by the DST Spon­sor, on a non-recourse basis, mean­ing it does not show up on your bal­ance sheet, as an investor.

Many accred­it­ed investors like to reduce their debt bur­den lat­er in life, which could cre­ate a prob­lem at death for their heirs.  With a DST, there is no per­son­al financ­ing approval required for cash investors unlike pur­chas­ing a prop­er­ty direct­ly and pos­si­bly hav­ing the need to acquire the financ­ing from a lender, DSTs offer non-recourse loans to investors that are not reliant on the investor’s abil­i­ty to secure financ­ing.

Real Estate and DSTs can be passed down through gen­er­a­tions.
Real estate is a tan­gi­ble invest­ment. It is one of the eas­i­est asset forms to pass down from gen­er­a­tion to gen­er­a­tion. Many peo­ple like the fact that they can leave their prop­er­ty in their will for their chil­dren and, in some cas­es, defer some of the tax­es. Like real prop­er­ty, a DST invest­ment will be part of your estate, some­thing you can pass on to your heirs.

Cash Investors can lat­er do a 1031 Exchange.
An inter­est­ing aspect for cash investors into a DST, is that when the invest­ment prop­er­ty is sold nor­mal­ly investors are required to pay cap­i­tal gains on any prof­it that they earn, but not so for a DST.  How­ev­er, once a DST asset is sold, investors have the option of com­plet­ing a 1031 exchange into anoth­er prop­er­ty which they own 100% or anoth­er frac­tion­al DST, and thus defer­ring any cap­i­tal gains.  Because the DST struc­ture con­firms to 1031 Exchange reg­u­la­tions, cash investors in a DST can enjoy the same tax-defer­ral ben­e­fits upon the sale of the DST prop­er­ty. In oth­er words, if the prop­er­ty has appre­ci­at­ed in val­ue, the investor is per­mit­ted to use a 1031 exchange to defer any cap­i­tal gains tax that would apply, by pur­chas­ing anoth­er like-kind prop­er­ty or invest­ing in anoth­er DST.

Cons of Cash Invest­ing in a DST

Long Hold Peri­ods

Delaware Statu­to­ry Trusts have hold­ing peri­ods that range between five and ten years. As an investor, your cap­i­tal will like­ly be involved through­out the life­cy­cle of the DST offer­ing. This hold­ing peri­od for a DST can be lengthy depend­ing on your goals.

This is ide­al for those who have long-term cap­i­tal goals, and plan to be involved in the DST for years. If you’re an investor seek­ing short­er-term invest­ments, a like-kind 1031 exchange might be the bet­ter option for you.

Few Ear­ly Exit Oppor­tu­ni­ties

It is very dif­fi­cult to divest shares of a DST before the full life­cy­cle is com­plete. Unlike the stock mar­ket or oth­er secu­ri­ties, there is no pub­lic mar­ket for divesti­ture, mean­ing an ear­ly exit can be tough.

It’s also com­mon for Delaware Statu­to­ry Trusts to place restric­tions on the resale of ben­e­fi­cial inter­ests. This means investors need approval from the DST spon­sor before any deci­sions are made. DSTs are secu­ri­ties under Fed­er­al law, so divest­ing has to fol­low reg­u­la­tions.

No Man­age­ment Con­trol

Some investors pre­fer hands-on invest­ments. This way, they can lever­age their expe­ri­ence and knowl­edge to boost the val­ue of the asset.

Does this sound like you? If so, DSTs may not be the choice for you.

DSTs are pro­fes­sion­al­ly man­aged with the spon­sors mak­ing the dai­ly deci­sions and oper­a­tions. Indi­vid­ual investors have no abil­i­ty to make deci­sions on the man­age­ment of assets.

Invest­ment Fees

Invest­ment fees of DSTs are often assessed upfront, dur­ing the hold­ing peri­od, and at dis­po­si­tion.  These fees often include sell­ing com­mis­sion, bro­ker allowance, asset acqui­si­tion, dis­po­si­tion expens­es, and oth­er orga­ni­za­tion­al expens­es.

In sum­ma­ry, invest­ing in a DST can offer many ben­e­fits for real estate investors. Yet, it’s impor­tant to con­sid­er the costs and com­plex­i­ty of trusts, as well as the poten­tial loss of con­trol and lim­it­ed use that may come with them. As with any big finan­cial deci­sion, it’s impor­tant to seek pro­fes­sion­al advice before invest­ing in a DST.

Sum­ma­ry

These rea­sons are why a grow­ing num­ber of Accred­it­ed investors are plac­ing cash into DSTs, to fur­ther diver­si­fy their tra­di­tion­al stock and bond port­fo­lios, to gain the many ben­e­fits of own­ing com­mer­cial real estate, with­out what we call the three Ts, no ten­ants trash and toi­lets, to deal with.

Al DiNi­co­la and Paul McIn­tyre are both hap­py to dis­cuss our DST con­sult­ing ser­vices and DST oppor­tu­ni­ties with prospec­tive investors. We’re here to help you strive to achieve your invest­ment goals.

Con­tact us today or vis­it www.DSTnews.org for more infor­ma­tion.

Al DiNi­co­la  adinicola@namcoa.com

Paul McIn­tyre pmcintye@namcoa.com

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