Understanding DST Risk: What Investors Must Know

Delaware Statu­to­ry Trusts (DSTs) have become a pop­u­lar option for investors seek­ing pas­sive real estate own­er­ship. This is espe­cial­ly evi­dent for those com­plet­ing a §1031 tax deferred exchange. Under­stand­ing the risk is nec­es­sary.

May 1, 2026

By Al DiNi­co­la, AIF®
Pri­vate Fund Advi­sor
DST 1031 Spe­cial­ist
Fidu­cia­ry Cap­i­tal Man­age­ment, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Intro­duc­tion

DSTs offer ben­e­fits like diver­si­fi­ca­tion, pro­fes­sion­al man­age­ment, and relief from day-to-day land­lord respon­si­bil­i­ties. We first iden­ti­fy if a DST may be appro­pri­ate and suit­able for indi­vid­ual investors because DSTs are not for every­one.

Facts are no invest­ment is with­out risk. Under­stand­ing DST invest­ment risks is essen­tial before com­mit­ting cap­i­tal. While DSTs are often con­sid­ered low­er main­te­nance than direct prop­er­ty own­er­ship, they still car­ry expo­sure to mar­ket con­di­tions, man­age­ment deci­sions, and struc­tur­al lim­i­ta­tions.

Over the past sev­en years we have writ­ten fre­quent­ly on a vari­ety of top­ics. Reg­u­lar­ly review­ing the risk is a worth­while study and edu­ca­tion­al exer­cise. This guide breaks down the most impor­tant Delaware Statu­to­ry Trust risk fac­tors and how investors can mit­i­gate them.

From a big pic­ture view there are Key DST Risks includ­ing Illiq­uid­i­ty, Mar­ket Risk, Spon­sor Risk, Ten­ant Risk, and to a cer­tain lev­el Inter­est Rate Risk. Let’s take a look at each.

Illiq­uid­i­ty- One of the most impor­tant risks to under­stand is illiq­uid­i­ty. This is one of the first suit­abil­i­ty analy­sis that we review for each investor. DST invest­ments are not pub­licly trad­ed, and there is typ­i­cal­ly no active sec­ondary mar­ket. Investors should expect to hold their invest­ment for the full life­cy­cle of the prop­er­ty. Full cycle refers to when the prop­er­ty will be mar­ket­ed and sold by the sponsor/trustee. This peri­od may be 5 to 10 years. Cer­tain DSTs recent­ly have short­er time peri­ods if there is an option (or require­ment) to move out of the DST via a §721 UPREIT.

It is very impor­tant to under­stand what this means for investors. You gen­er­al­ly can­not access your cap­i­tal ear­ly. Emer­gency liq­uid­i­ty needs must be planned out­side the DST. Exit tim­ing is con­trolled by the spon­sor, not the investor. If an investor wish­es to be active­ly involved with man­ag­ing the prop­er­ty as well as decid­ing on when to sell the prop­er­ty, this is a def­i­nite indi­ca­tion that the DST invest­ment is not suit­able for the investor.

Mar­ket Risk- Like all real estate invest­ments, DSTs are sub­ject to mar­ket risk. DSTs may be locat­ed all over the coun­try.  The same mar­ket risks that affect com­mer­cial real estate would also affect DST prop­er­ties. Prop­er­ty val­ues and income poten­tial fluc­tu­ate based on typ­i­cal­ly on Eco­nom­ic cycles. There may also be Local real estate con­di­tions. From an eco­nom­ic per­spec­tive there are sup­ply and demand in prop­er­ty sec­tors, infla­tion, and employ­ment trends that also may affect cer­tain DST offer­ings more than oth­er DST offer­ings. Even well-select­ed prop­er­ties can decline in val­ue dur­ing down­turns.

Exam­ple: A mul­ti­fam­i­ly DST may per­form well in a strong rental mar­ket but strug­gle if local job growth declines. Over the past few years (post COVID) there was a buildup and then deliv­ery of mul­ti­fam­i­ly units in near­ly all mar­ket­places.  When the back­log of sup­ply was deliv­ered it put pres­sure on rent increas­es as well as occu­pan­cy. It appears the sup­ply is adjust­ing by the third quar­ter of 2026. 

Spon­sor Risk- DSTs are ful­ly man­aged by a spon­sor, mak­ing spon­sor selec­tion crit­i­cal. The spon­sor is respon­si­ble for sourc­ing the oppor­tu­ni­ty and prop­er­ty acqui­si­tion. This includes financ­ing deci­sions on how to tie up the prop­er­ty, struc­ture the offer­ing and sell out the offer­ings (aka ful­ly sub­scribe).  There is also asset man­age­ment.  Cer­tain spon­sors may out­source prop­er­ty man­age­ment to large nation­al firms while oth­ers may be ver­ti­cal­ly inte­grat­ed and han­dle prop­er­ty man­age­ment. Then there is ulti­mate­ly the dis­po­si­tion strat­e­gy. This strat­e­gy will incor­po­rate the spread between the acqui­si­tion cap rate and the dis­po­si­tion cap rate. Poor deci­sion-mak­ing or lack of expe­ri­ence can sig­nif­i­cant­ly impact returns.

The Key con­cerns include an Inex­pe­ri­enced spon­sor. If there is weak finan­cial back­ing when acquir­ing the prop­er­ty this needs to be ana­lyzed. There are also mis­aligned incen­tives mean­ing how the spon­sor will receive com­pen­sa­tion for man­ag­ing and dis­pos­ing of the prop­er­ty.  

This is why DST mar­ket and spon­sor risk often go hand in hand.

Ten­ant Risk- Income from a DST depends heav­i­ly on ten­ant per­for­mance. The risks include first and fore­most ten­ant default or bank­rupt­cy. There is also the lease non-renew­al per­cent­age. High vacan­cies, espe­cial­ly in mul­ti­fam­i­ly increas­es stress on the cash flow. We have also expe­ri­enced indus­try-spe­cif­ic down­turns (e.g., retail or office space) dur­ing COVID.

For sin­gle-ten­ant DSTs, this risk is even more con­cen­trat­ed. If the ten­ant fails, income can drop dra­mat­i­cal­ly.

Under­stand­ing DST ten­ants and lease risk goes a lit­tle deep­er. Long-term leas­es pro­vide sta­bil­i­ty. How­ev­er, the ten­ant needs to remain finan­cial­ly strong. Diver­si­fied, mul­ti-ten­ant prop­er­ties may reduce this risk. An asset class such as self-stor­age appears to be some­what resis­tant to ten­ant risk in spite of month­ly turnovers.   

Inter­est Rate Risk- Inter­est rates may play a major role in DST per­for­mance. Ris­ing rates can increase bor­row­ing costs (for vari­able-rate debt struc­tures). Most DST have a fixed inter­est rate. Typ­i­cal­ly inter­est only for a peri­od of time and then poten­tial­ly mov­ing to an amor­tized loan. DST may not be refi­nanced as part of the struc­ture. Inter­est rates may affect the ulti­mate sale of the prop­er­ty when a new buy­er arranges financ­ing for the pur­chase.  This may affect the poten­tial prop­er­ty val­ue. Cer­tain tra­di­tion­al real estate is expe­ri­enc­ing this in deceas­ing the mar­ket liq­uid­i­ty.

The big ques­tion is How to Mit­i­gate DST Invest­ment Risk

While risks can­not be elim­i­nat­ed, they can be man­aged intel­li­gent­ly. Here’s how expe­ri­enced investors approach risk reduc­tion.

Diver­si­fy Across Invest­ments

Avoid con­cen­trat­ing all cap­i­tal into a sin­gle DST.  Based on the investor’s long terms goals the approach we sug­gest is the invest across mul­ti­ple DSTs. Spread­ing cap­i­tal across prop­er­ty types (mul­ti­fam­i­ly, indus­tri­al, med­ical, etc.) helps to diver­si­fy the port­fo­lio. In addi­tion, diver­si­fy­ing geo­graph­i­cal­ly helps reduce expo­sure to any sin­gle mar­ket or ten­ant.

Eval­u­ate the Spon­sor Care­ful­ly

The spon­sor is arguably the most impor­tant fac­tor in DST suc­cess. The nor­mal review would look for a proven track record across mul­ti­ple mar­ket cycles. This includes Trans­par­ent report­ing prac­tices. Strong cap­i­tal­iza­tion and expe­ri­ence with sim­i­lar asset class­es enables a spon­sor to present the strongest posi­tion for suc­cess.  We attend many due dili­gence meet­ings, both third par­ty as well as spon­sors ses­sions. We ask spe­cif­ic ques­tions and review past per­for­mance. These ques­tions go beyond just pro­jec­tions.

Review the Offer­ing Mem­o­ran­dum Thor­ough­ly. Every DST comes with a Pri­vate Place­ment Mem­o­ran­dum (PPM) that out­lines risks, fees, debt struc­ture, exit strat­e­gy, prop­er­ty details and oth­er back­ground mate­ri­als on the site-spe­cif­ic asset. Nev­er skip this step. This doc­u­ment is essen­tial for under­stand­ing DST risks for investors. We have writ­ten exten­sive­ly on this top­ic.  (Here is a link to a White Paper on PPM review). The Com­plete White Paper- How to Review a Pri­vate Place­ment Mem­o­ran­dum (PPM) for a Delaware Statu­to­ry Trust — DST Edu­ca­tion and Mar­ket News

Under­stand Debt and Lever­age. There­has been a strat­e­gy in real estate to use oth­er people’s mon­ey or lever­age. Lever­age can enhance returns. How­ev­er, it also increas­es risk. We review the loan type (fixed vs. vari­able), loan-to-val­ue (LTV) ratio, matu­ri­ty time­line, pre­pay­ment penal­ties and oth­er fac­tors. DST are struc­tured with debt for many rea­sons, includ­ing the abil­i­ty for 1031 exchange investors to sat­is­fy replace­ment of debt as required by IRC. Low­er lever­age gen­er­al­ly means low­er risk—but also poten­tial­ly low­er returns.

Con­clu­sion

DSTs can offer a com­pelling alter­na­tive to active real estate own­er­ship, espe­cial­ly for investors seek­ing pas­sive income and 1031 exchange solu­tions.

How­ev­er, they are not risk-free. From illiq­uid­i­ty and mar­ket fluc­tu­a­tions to spon­sor and ten­ant risks, each fac­tor plays a role in over­all per­for­mance.

The key to suc­cess is edu­ca­tion and due dili­gence. Investors who take the time to under­stand DST invest­ment risks and apply smart risk mit­i­ga­tion strate­gies are far bet­ter posi­tioned to achieve sta­ble, and poten­tial­ly pre­dictable out­comes.

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@Fiduciarycm.com.

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