Why Multifamily DSTs May Outshine Single-Tenant Net-Leased DSTs in Risk Management

For investors leveraging IRC Section 1031 exchanges, Delaware Statutory Trusts (DSTs) offer compelling tax deferral and passive income. However, not all DSTs carry equal risk. Multifamily DSTs with hundreds of tenants often present a lower risk profile than single-tenant net-leased DSTs due to diversification and resilience against tenant-specific challenges. Here’s why:

Diversified Revenue Streams

Multifamily DSTs, such as apartment complexes with hundreds of tenants, distribute income across numerous leases. If one tenant defaults or vacates, the impact is minimal—e.g., a 2% vacancy in a 200-unit property affects only $4,000 of a $200,000 annual cash flow. Conversely, single-tenant net-leased DSTs (e.g., a Walgreens or Dollar General) rely entirely on one tenant. Bankruptcy or lease non-renewal halts 100% of income, risking total cash flow loss until a new tenant is secured.

Bankruptcy Risk Mitigation

Single-tenant DSTs face heightened exposure to tenant bankruptcy. Even creditworthy tenants (e.g., BBB-rated firms) can falter—retail bankruptcies like Sears or Rite Aid have left net leases vacant. Multifamily DSTs spread this risk across tenants, reducing the likelihood that multiple bankruptcies occur simultaneously. Historical data shows multifamily vacancy rates stabilize at 5%-7%, far less volatile than single-tenant properties that experience negative outcomes.

Lease Term Flexibility

Net-leased DSTs often lock into 10-15 year leases, offering stability until expiration or tenant failure disrupts cash flow. Multifamily DSTs, with shorter lease terms (e.g., 1 year), adapt quickly to market conditions, adjusting rents to offset losses and maintain revenue while also keeping up with inflation.

Market Resilience

Multifamily properties benefit from consistent housing demand, even in downturns, as people always need homes. Single-tenant retail or office DSTs tie returns to one business’s success, amplifying risk in economic shifts (e.g., e-commerce growth impacting brick-and-mortar tenants).

Depreciation Advantages

Multifamily DSTs offer higher after-tax income due to a faster depreciation schedule and cost segregation strategies. Multifamily DSTs with moderate leverage can further boost this tax advantage.

1031 DST Solution presented by Corcapa 1031 Advisors has historically favored multifamily and other multi-tenant asset classes. We rigorously vet properties in high-demand markets, ensuring diversified tenant bases and evaluate realistic cash flows. Single-tenant options may appear attractive to stability seekers, but multifamily DSTs offer a safer harbor against bankruptcy and concentrated tenant risks.

For a 1031 exchange balancing tax deferral, tax advantaged income and risk mitigation, multifamily DSTs with hundreds of tenants often outperform. Contact us at (949) 722-1031 or schedule a consultation to discuss your specific goals.