Benefits & Risks of DST Investing

Intro:
DSTs may pro­vide pas­sive real estate own­er­ship, poten­tial 1031 replace­ment-prop­er­ty flex­i­bil­i­ty, pro­fes­sion­al man­age­ment, and diver­si­fi­ca­tion oppor­tu­ni­ties. They also involve impor­tant risks, includ­ing illiq­uid­i­ty, lim­it­ed con­trol, spon­sor depen­dence, lever­age, fees, and poten­tial loss of prin­ci­pal.

At a Glance

Poten­tial Ben­e­fit	Cor­re­spond­ing Risk
Pas­sive own­er­ship	Lim­it­ed con­trol
1031 replace­ment option	Strict tax rules
Pro­fes­sion­al man­age­ment	Spon­sor depen­dence
Diver­si­fi­ca­tion	Mar­ket risk remains
Peri­od­ic dis­tri­b­u­tions	Dis­tri­b­u­tions can change
Frac­tion­al own­er­ship	Lim­it­ed liq­uid­i­ty

Poten­tial Ben­e­fits

Pas­sive Real Estate Own­er­ship
Investors gen­er­al­ly avoid day-to-day land­lord respon­si­bil­i­ties such as leas­ing, repairs, ten­ant calls, and prop­er­ty man­age­ment.

Poten­tial 1031 Replace­ment Prop­er­ty
Cer­tain prop­er­ly struc­tured DST inter­ests may qual­i­fy as replace­ment real prop­er­ty in a Sec­tion 1031 exchange.

Pro­fes­sion­al Man­age­ment
The spon­sor and prop­er­ty man­ag­er typ­i­cal­ly han­dle oper­a­tions, leas­ing, report­ing, and prop­er­ty-lev­el deci­sions.

Diver­si­fi­ca­tion
Exchange pro­ceeds may poten­tial­ly be allo­cat­ed among mul­ti­ple prop­er­ties, spon­sors, geo­graph­ic mar­kets, or asset types.

Access to Larg­er Prop­er­ties
DSTs may allow investors to par­tic­i­pate in insti­tu­tion­al-scale com­mer­cial real estate with­out pur­chas­ing an entire prop­er­ty.

Frac­tion­al Invest­ment Siz­ing
Investors can gen­er­al­ly pur­chase a por­tion of a prop­er­ty rather than an entire asset, which may pro­vide flex­i­bil­i­ty when allo­cat­ing exchange pro­ceeds.

Impor­tant Risks

Illiq­uid­i­ty
DST inter­ests are gen­er­al­ly long-term invest­ments with no read­i­ly avail­able pub­lic mar­ket.

Lim­it­ed Investor Con­trol
Investors typ­i­cal­ly can­not inde­pen­dent­ly decide when to refi­nance, change man­age­ment, mod­i­fy the prop­er­ty, or sell.

Spon­sor Risk
Invest­ment results depend in part on the spon­sor’s acqui­si­tion, man­age­ment, financ­ing, and dis­po­si­tion deci­sions.

Real Estate Risk
Prop­er­ty val­ues, occu­pan­cy, rents, expens­es, ten­ants, and mar­ket con­di­tions can change.

Debt and Refi­nanc­ing Risk
Lever­aged DSTs may face high­er bor­row­ing costs, refi­nanc­ing chal­lenges, or increased loss­es if prop­er­ty per­for­mance declines.

Dis­tri­b­u­tion Risk
Pro­ject­ed dis­tri­b­u­tions are not guar­an­teed and may be reduced or sus­pend­ed.

The Most Impor­tant Trade-Off

A fea­ture that looks like a ben­e­fit can also cre­ate a risk.

Pas­sive own­er­ship means less man­age­ment responsibility—but also less con­trol. Lever­age may enhance returns—but can mag­ni­fy loss­es. Diver­si­fi­ca­tion may spread exposure—but does not elim­i­nate mar­ket risk. A Sec­tion 1031 exchange may defer tax—but tax defer­ral does not make a poor invest­ment attrac­tive.

Due Dili­gence Before Invest­ing

+ The Prop­er­ty

Ques­tions about occu­pan­cy, ten­ants, leas­es, rents, mar­ket, and cap­i­tal improve­ments.

The Spon­sor

Ques­tions about track record, finan­cial strength, pri­or pro­grams, and con­flicts.

The Financ­ing

Ques­tions about LTV, inter­est rate, matu­ri­ty, refi­nanc­ing, and debt ser­vice.

The Fees

Ques­tions about com­mis­sions, acqui­si­tion fees, man­age­ment fees, and dis­po­si­tion fees.

The Income

Ques­tions about the source and sus­tain­abil­i­ty of dis­tri­b­u­tions.

The Exit Strat­e­gy

Ques­tions about hold­ing peri­od, sale assump­tions, sec­ondary-mar­ket liq­uid­i­ty, 1031, and poten­tial 721 strate­gies.