DST Benefits and Risks
Learn more about the potential benefits and potential risks of Delaware Statutory Trust Investments.
There are a number of potential benefits of exchanging into a 1031 Exchange DST. As a 1031 investor, reviewing the potential benefits and potential risks prior detail prior to investing.
Potential Advantages of Delaware Statutory Trusts
DST’s are attractive for the following reasons:
Diversification
Investors can select multiple DST properties as part of their 1031 exchange allowing diversification of asset classes, cities and level of needed non-recourse debt.
Lower Minimum Investments
DSTs have lower minimum investments often as low as $100,000 of equity. If you require a lower investment amount than the stated minimum, let your Corcapa 1031 Exchange representative know and we may be able to negotiate a reduction in certain circumstances.
No Individual Annual LLC Filings
Potentially lower fees in DST investments than TIC investments. The DST investment does not require a special purpose LLC entity that needed to be annually maintained and paid for.
Potentially Greater Cash Flow
The most common reason that investors select DSTs is for a potentially greater cash flow than they are currently receiving. Most DSTs have between a 4.00% – 5.50% projected cash flow based on the anticipated rental income less expenses. For example, if you invest $1,000,000 of equity into a DST with a 4.5% projected cash flow, this would provide a projected net annual income of $45,000. This could be a higher net cash flow than you are currently receiving on your rental property. As with all real estate, the income cannot be guaranteed because the rental income and expenses can increase or decrease unexpectedly.
Non-Recourse Loans
Virtually all the loans within the DSTs that are approved by DAI Securities, LLC are non-recourse which means the investor does not personally guarantee them.
Financing Access
Easier access to financing for investors needing debt on their replacement property and potentially quicker closings.
Larger Property Access
Access to Institutional Grade properties which are typically larger commercial properties that previously required significant capital to purchase.
Potential Risks of Delaware Statutory Trusts
As with any investment, 1031 exchanges and DST’s have certain risks:
No Assurance
General real estate risks and market also apply to DSTs. There can be no assurance that a property will perform as projected and DSTs are subject to economic volatility, tenants not paying their rent timely, and other traditional risks of owning, selling, and operating real estate.
Investors Do Not Hold Title
DST investors do not hold title to the investor but rather own beneficial interests in the trust and the sponsor controls the selling and managing of the property. The DST owners have limited control over the investment and are reliant on the sponsor.
Illiquidity
A DST interest is an illiquid investment and there is no current active secondary market for selling your interest.
Additional Expenses
Fees and Expenses of each offering should be carefully evaluated. Multiple owner offerings typically have additional expenses to owning real estate on your own and these fees should be weighed against specific capital gains tax liability. All investors are encouraged to have their tax and legal counsel advise them on taxes including any federal and state capital gains taxes, depreciation recapture and the recent 3.8% Medicare tax, which could be applicable.
Tax Status
DSTs are structured according the Revenue Ruling 2004-86. Corcapa and DAI Securities, LLC typically work with sponsors and properties that have “should” level tax opinions regarding 1031 exchange tax compliance but its possible the IRS would rule unfavorably on a DST offering and this could result in back and immediate tax liability.
Potential for Property Value Loss
All real estate investments have the potential to lose value during the life the investment.
Potential for Foreclosure
All financed real estate investments have the potential for foreclosure.
Reduction or Elimination of Monthly Cash Flow Distributions
Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is a potential for suspension of cash flow distributions.