If you want to take advantage of 1031 but don’t want to manage a commercial property yourself, a 1031 Delaware Statutory Trusts provides exceptional benefits.
As 1031 experts, we at JTC sometimes take for granted that we have access to some of the best minds in the business when it comes to 1031. For those just getting started, we want to make sure we periodically take a step back and cover the 1031 basics. One topic we’re frequently asked about is 1031 Delaware Statutory Trusts, which have become incredibly popular among 1031 investors, but remain a mystery to many.
Let’s answer some common questions and discuss the basics of DSTs so you can decide if this type of investment is right for you.
What exactly are Delaware Statutory Trusts? Do I have to live in Delaware to participate?
Delaware Statutory Trusts are passive real estate investments that involve a group of investors buying a property or group of properties that are managed by a professional property manager. Essentially, an entity is created that acts as the “master tenant” and owns the properties, and individuals invest in that entity without having to form and manage individual LLCs or actively manage the properties.
You do not have to live in Delaware to participate in a DST, and since DST investments qualify as real property for the purposes of a 1031 exchange, they present great opportunities for those who want to diversify or create passive income through their 1031 investments. Instead of investing the proceeds of a property sale into owning a residential property and renting it out, you can invest in a DST.
What advantages does a DST have over a single-property 1031 exchange?
There are a lot of advantages to a DST, so many that they can’t all be listed here. Investors who aren’t experienced with commercial real estate will appreciate their simplicity, and the fact that you don’t have to worry about deciding when to sell the properties on your own.
For investors who have previously owned houses or small multifamily apartment buildings as 1031 properties, DSTs are different in several ways that are generally considered key benefits:
- No rehab or property management. Instead of having to perform repairs, collect rent, and find tenants for your property, a professional property manager will handle the day-to-day for all properties in the DST.
- Low barrier to entry. While the price of a rental home can be expensive depending on the area, most DSTs do not require you to have that level of cash (or to take on additional debt) in order to invest.
- Instant diversification. Instead of being limited to a single property, you’ll have access to the DST’s entire portfolio.
- They can be combined. After selling an investment property, you can reinvest the gains into multiple DSTs as part of your 1031 exchange strategy.
- Access to new markets. Instead of being limited to one type of property, a DST could contain houses, apartment buildings, commercial real estate, and hospitality properties, all in one portfolio.
If you’re having trouble deciding which type of 1031 ownership structure is right for you, consult our full guide here.
What are the downsides of 1031 Delaware Statutory Trusts?
The big downside of investing in a DST is that you don’t have control: you don’t decide what properties are purchased, how much rent is charged at those properties, or even when the properties are sold. If you want to have control over those decisions, a DST is probably not right for you. However, if you’re looking for a passive investment that still qualifies for 1031, a DST can take a lot of the hassle off your plate while offering competitive returns.
How many investors are in a typical DST?
While a TIC, or tenant-in-common organization, limits you to 35 investors, DSTs do not have those restrictions, and can have hundreds of investors. There is usually a cap defined at the outset, often in the range of 99-499 investors. Having this many investors creates two key benefits:
- With so many investors, the DST can purchase more properties and create a diverse investment portfolio
- The initial required investment can remain quite low, allowing investors to enter sectors that otherwise might be closed off to them.
What is the average initial investment for a DST?
Each 1031 Delaware Statutory Trust has its own rules, which vary based on the properties it plans to purchase and the number of investors. A typical minimum investment amount is $100,000 for those planning to do a 1031 exchange. However, some go as low as $25,000, meaning even those without large gains from a property sale can participate.
How many properties are managed in a typical DST?
DSTs can be considered in two types: single-asset and multi-asset. Single-asset DSTs involve the purchase of one large commercial property, while multi-asset DSTs involve the purchase of several properties. Single-asset DSTs are more common because they’re simpler, but lack the diversification that makes multi-asset DSTs more attractive to many investors. Because the number of properties can vary widely, so can the AUM, which may lie somewhere between $15 million and $150 million.
What kind of return can I expect from Delaware Statutory Trusts investment?
A big advantage of DSTs is that they create passive income in the form of rent from tenants, but don’t require the investor to personally collect that money. The average return is difficult to define because it depends on the types of properties in the DST portfolio and the risk level, but can be anywhere between 4% and 9% cash on cash (CoC).
In addition to the CoC return (called that because the cash received is based on the cash put in), there is also appreciation that is realized when the asset is sold. Because DST assets are held for as long as 10 years, this appreciation can be considerable, though it depends not only on the period of time the asset is held, but the market at the time of sale.
What is the length of time a DST investment must be held?
The holding period for a DST is set prior to your investment, and will be no more than 10 years. If you want to sell your interest before that time, it is possible to do so, and you may be able to qualify for 1031 after selling your share even if you didn’t hold it for the entire cycle.
However, there is no centralized secondary market for DST investments, meaning you can’t quickly find a buyer for your DST interest in the same way you can with stocks or other investments. There’s no guarantee you’ll be able to find a buyer, which is why some experts recommend that you don’t invest in a DST unless you plan to hold that interest for the full cycle.
Can I invest in a DST even if I’m not doing a 1031 exchange?
While 1031 Delaware Statutory Trusts are popular with 1031 investors, it’s possible to participate without doing a 1031 exchange. Minimum investment amounts may vary based on whether you’re doing 1031, and can be lower for those not performing an exchange – the minimum may be $100,000 for 1031 investors but only $25,000 for non-1031 investors. This lower minimum allows those who don’t have large gains from a property sale to invest in a DST without having to wait until they can save up a large sum.
Is the 1031 process the same when investing in a DST?
The rules for 1031 are the same regardless of whether your replacement property is a single property or a DST, and you will still need a Qualified Intermediary. JTC has decades of experience as a QI and has performed tens of thousands of successful 1031 transactions. We have the experience necessary to help you do things right and meet all requirements for 1031.
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