Chapter 4
DSTs vs. Direct Real Estate
Delaware Statutory Trusts vs. Direct Real Estate ownership.
One of the most common questions investors ask when considering a 1031 exchange is whether they should purchase another property directly or invest through a Delaware Statutory Trust (DST). Both approaches can qualify as like-kind replacement property, but they offer very different ownership experiences.
Management Responsibility
Direct ownership requires the investor to either manage the property themselves or hire and oversee a property manager. This includes handling tenant issues, maintenance, vacancies, rent collection, and capital improvements. In contrast, a DST eliminates nearly all day-to-day responsibilities. The sponsor manages all operational aspects of the property.
Control
With direct ownership, the investor retains full decision-making authority. They can choose tenants, set rents, decide on improvements, and determine when to sell. With a DST, the investor gives up control. All major decisions are made by the sponsor according to the terms of the trust.
Diversification
Purchasing a single direct property concentrates risk in one asset, one location, and often one tenant profile. DSTs allow investors to spread capital across multiple properties and asset classes, which can reduce the impact of any single underperforming investment.
Access to Larger Assets
Direct ownership is often limited by an investor’s available capital. DSTs provide access to larger, institutional-quality properties that would typically be out of reach for individual investors.
Debt and Financing
When buying directly, investors usually must qualify for financing and may be required to personally guarantee loans. Many DSTs use non-recourse debt, meaning the investor is not personally liable for the loan.
Liquidity and Exit
Directly owned properties can generally be sold when the owner chooses (subject to market conditions). DST interests are much less liquid and are designed to be held until the sponsor eventually sells the underlying asset.
Time Commitment
Direct ownership often requires ongoing involvement, even when using professional management. DSTs are structured for minimal time commitment after the initial investment.
Which Approach is Better?
There is no universally correct answer. Direct ownership may be preferable for investors who want control, are comfortable with active management, and have the time and expertise to oversee real estate. DSTs are generally more suitable for investors who prioritize simplicity, reduced management burden, and diversification, and who are willing to accept less control and lower liquidity.
Which Real Estate Ownership Strategy Fits Your Goals?
If you would like help evaluating whether direct ownership or a DST structure better aligns with your goals, schedule a consultation or a brief call today by calling (949) 722-1031.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
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