DST Investments: Are They Right For You?
When it comes to investing, there a number of various options available to accredited investors and high-net-worth individuals. Delaware statutory trusts (DSTs) may be a good option for those looking for a stable and secure investment opportunity. The state of Delaware regulates DSTs and offers investors certain tax benefits and protections.
This article will provide an overview of DST investments, including what they are, how they work, and the benefits they offer. We will also answer some common questions about DSTs, so you can decide if this investment option is right for you.
DST Investments: An Overview
A DST (Delaware Statutory Trust) is an investment vehicle that allows multiple investors to pool their resources and purchase property together. The property is then held in a trust, and the trustees manage the property on behalf of the investors.
DSTs are often used to invest in commercial real estate, such as office buildings, shopping centers, or warehouses. However, they can also be used to invest in other property types, such apartment buildings and student housing communities.
DSTs offer several benefits to investors, including tax breaks and asset protection. They are also relatively low-risk investments, since the trustees manage the property and handle all the day-to-day responsibilities. In some instances, they are secured with debt which is non-recourse to the investor. From a tax perspective, each investor in a DST files a Schedule E with their personal return (not a K-1) and has the advantage of depreciation throughout the hold period.
If you’re looking for a stable investment with potential for appreciation, a DST may be a good option for you.
How do DST Investments Work?
DST investments are made through a Delaware Statutory Trust (DST), which is a type of business trust created by state statute. DSTs are commonly used to invest in real estate but can also be used for other types of investments. They are typically only available to accredited investors, which are investors who meet certain income and net worth requirements.
DSTs are a good vehicle to be used for 1031 tax-deferred exchanges. In a 1031 exchange, an investor sells one property and uses the proceeds to purchase another property. The exchange allows the investor to defer paying taxes on the gain from the sale of the first property. As you can imagine, there are many details to be considered, such as the basis for the asset being sold, but bottom line – a DST provides a potential investment strategy which is attractive to investors.
The Benefits of DST Investments
Delaware Statutory Trusts, or DSTs, offer many benefits to potential investors. These include advantageous tax breaks and asset protection. DSTs are also a lower-risk investment when compared to others, as the trustee manages the property and handles all duties associated with it on a daily basis. Consequently, this type of trust may be an appealing option for those interested in investing in real estate.
Some of the specific benefits of DST investments include:
- DSTs offer tax breaks for investors. Delaware Statutory Trusts are often used in 1031 exchanges, which allow investors to defer capital gains taxes on the sale of a property.
- DSTs offer asset protection. The property is held in a trust, which protects it from the claims of creditors.
- DSTs are low-risk investments. The trustee manages the property and handles all the day-to-day responsibilities, so investors don’t have to worry about these issues, as long as they are comfortable with the trustee handling the asset.
The Risks of DST Investments
While Delaware Statutory Trusts offer some potential benefits, they also come with some risks and drawbacks. Investors should be aware of these before putting money into a DST.
Some of the risks and drawbacks of DST investments include:
- Lack of liquidity. DSTs are not as liquid as other investments, such as stocks or bonds. Investors may have to wait 10 years or more to get their money back from a DST.
- High minimum investment. DSTs typically have a high minimum investment, which may be out of reach for some investors.
- The property may not appreciate in value. While DSTs offer the potential for appreciation, there is no guarantee that the property will increase in value.
Who Should Consider Investing in a DST?
There are a few key factors that potential investors should consider when it comes to DST investment. First and foremost, DSTs are only available to accredited investors, as defined by the Securities and Exchange Commission. This means that DSTs are only suitable for individuals with a high net worth, as well as certain types of institutions.
That said, there are also many advantages to investing in a DST. One of the most significant is that DSTs offer a high degree of asset diversification. By pooling together, the resources of multiple investors, DSTs allow individuals to spread their risk across many properties. This can be especially beneficial for those looking to invest in multiple properties.
Another advantage of DSTs is that they offer a high level of professional management. DST sponsors should have experience in managing real estate investments, and they are typically responsible for all aspects of the DST, from acquiring properties to overseeing day-to-day operations. The investor must be certain this to be the case and, if so, this can provide peace of mind for DST investors, who may not have the time or expertise to manage their investment themselves.
Things to Keep in Mind When Investing in a DST
When considering investing in a Delaware Statutory Trust (DST), investors should keep the following best practices in mind:
- Review the DST’s business purpose and formation documents.
- Understand the nature of trust property and the rights of the beneficiaries.
- Be aware of the fees associated with DST and how they are paid.
- Know who is responsible for managing the DST property and make sure they are qualified to do so.
- Have a clear exit strategy in place before investing.
Each of these best practices is important to follow in order to ensure a successful DST investment. Let’s take a closer look at each one.
1. Review the DST’s business purpose and formation documents.
Before investing in a DST, it is important to review the formation documents, such as the trust agreement and offering circular/memorandum. These documents will contain important information about the DST, including the property being purchased, the trustee’s duties and responsibilities, and the rights of the investors.
2. Understand the nature of the trust property and the rights of the beneficiaries.
It is important to understand both the trust property and the rights of the beneficiaries before investing in a DST. Trust property is typically real estate, and the rights of the beneficiaries are spelled out in the trust agreement.
3. Be aware of the fees associated with the DST and how they are paid.
There are various fees associated with investing in a DST, including management fees, acquisition fees, and disposition fees. These fees can be paid by the trust or by the beneficiaries. It is important to be aware of how these fees are paid so that you can budget accordingly.
4. Know who is responsible for managing the DST property and make sure they are qualified to do so.
The DST property is managed by a trustee. Therefore, it is important to know who the trustee is and to make sure they are qualified to manage the property. In addition, the trustee should have experience managing similar properties and be familiar with the local market.
5. Have a clear exit strategy in place before investing.
There are several common exit strategies for DSTs, including reinvesting the proceeds in a 1031 tax-deferred exchange, selling the property, or taking the sale proceeds distribution in cash. Each option has its own pros and cons, so it is important to consult with a financial advisor to determine which exit strategy is right for you.
By following these best practices, investors can increase their chances of success when investing in a Delaware Statutory Trust. Remember that it is always best to consult with a financial advisor to get guidance on whether a DST investment is right for you.