Don’t Forget DSTs for Diversification

Travis Traweek

The majority of multifamily real estate investors have heard about Delaware Statutory Trusts, but it is important to understand exactly how they work and the benefits they provide. Below is a brief breakdown of what a DST is and why it makes sense to consider adding to an investor’s portfolio.

A DST is a type of legal trust structure that allows investors to own fee-simple interests in a property or portfolio. This can be beneficial for investors who don’t have the liquidity to purchase an entire property outright, as well as those who want diversification without the hassle of owning and managing multiple properties.

One of the most desirable facets of a DST is that its structure qualifies the investment as 1031 exchange eligible. While every deal is different, DSTs are able to offer investors a debt and equity model that allows for the deferment of capital gains upon the sale of their downleg. Since the properties are already owned by the trusts, closings can happen in as little as three days, thus relieving the burden of the 45-day identification period and 180-day closing timeline of a traditional 1031 exchange.

A big advantage of investing in a DST is the tax benefits associated with it. The tax savings from DST investments can be substantial, depending on individual circumstances. The trust structure allows investors to take advantage of certain tax deductions that are not available with other types of real estate investments. Additionally, DSTs can provide investors with greater flexibility when it comes to structuring their investments for maximum tax efficiency.

At Stepp Commercial Group, we have worked with a significant number of clients who have become fatigued with the ever-changing rent control laws and intensive management that is required to own apartment assets in Southern California. The DST structure has proven beneficial to these investors as it offers strong returns, while allowing our investor clients to diversify across multiple asset classes to mitigate risk.

Safe Exit Strategy

While we have many notable examples, one particular 1031 exchange we completed in 2019 provided our recently retired client with an unbeatable return. Our investor client had owned two apartment buildings in Long Beach as well as a medical office building in the City of Los Angeles, all with zero debt. The assets were nearing the end of their depreciation schedule and our client was eager to exit the political atmosphere that was hindering his ability to effectively run the properties. After the sale of the downlegs, we had roughly $5.6 million in equity to place and were able to identify three separate DST offerings that fit the investor’s criteria. All three of the investments were located in more business-friendly markets, and the annual cash-flow increased 51 percent—from $272,000 to $412,000.

In conclusion, DSTs provide unique opportunities for real estate investors looking for diversification without complex record-keeping or taxation issues. By allowing fractional ownership opportunities and providing enhanced asset protection benefits, DSTs offer significant advantages over more traditional investment options. Investors who are looking for ways to add diversity and value to their portfolio, it’s worth considering adding a DST to the mix.

Travis Traweek is vice president, Stepp Commercial Group.