The Delaware Statutory Trust (DST) is a legal entity used in real estate investing that allows several investors to pool money and hold fractional interests in the holdings and assets of the trust. The DST gives investors limited liability while also providing pass through income and cash distributions.
More and more investors are turning to DSTs as a passive investment vehicle. They offer diversification and exposure to institutional grade real estate; generally, the real estate owned in a DST is Class A multi-family, medical buildings, hospitals, senior and student living, and more.
Here are eight reasons why I advise my clients to consider investing in a DST:
- It’s a Passive Investment: Many investors don’t have the time or desire to manage their own real estate investments. The DST removes all the typical “landlord responsibilities”, like ongoing repairs, court cases or around-the-clock phone calls.
- It Adds Diversity to Your Portfolio: DSTs can hold multiple assets within one structure, meaning you could invest in a single DST and hold a fractional interest in multiple property types, for example a variety of single tenant NNN leased properties.
- You Gain Access to Institutional-Grade Properties: DSTs must follow rigid criteria established by the IRS, requiring them to own high-quality assets with credit-worthy tenants. Purchased on their own, these properties would be out of reach for many independent investors, but through the DST structure it is attainable to own a fractional share.
- It Offers Highly Favored Tax Treatment: A DST is not considered a taxable entity; therefore, all profits and losses are passed through to the investors. This means investors participate in depreciation and amortization the same way they would if they owned 100% interest in the property, without the hassle of property management.
- It’s an Alternative to Like-Kind Property: In a competitive real estate market like what we’re currently experiencing, it can be difficult to identify a like-kind property for a 1031 exchange. DSTs can be used as a replacement property, satisfying IRS Revenue Ruling 2004-86.
- Investors Don’t Have to Qualify for the Debt: The DST is the only entity liable for the mortgage loan, therefore the lender only underwrites the DST, making the loan non-recourse to the investor. Investors don’t need to provide documentation for loan approval and don’t need to worry about their other liabilities or assets affecting the loan status.
- It’s an Ideal Option for Retirement Planning: DSTs offer many retirement and estate planning options. Passive income and elimination of personal liability makes it ideal for aging investors, and DSTs allow wealth transfer, enabling an investor to pass DST ownership to multiple heirs.
- DSTs Offer Greater Income Potential: DST properties are structured with an emphasis on cash flow. By targeting high-quality assets in major markets, DSTs can offer a greater income potential for investors, enabling independent investors to generate more monthly income than they could through direct ownership of a property.
I always remind my clients that just like any investment in real estate, investing in a DST has its risks; they will still be subject to market fluctuations, property vacancies, taxes, and fees. However, if you are looking for a passive investment that has a low minimum (a typical minimum investment is $100,000) then a Delaware Statutory Trust might be right for you!
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.
