As Delaware Statutory Trusts (DSTs) become recognized for their tax-deferral benefits and potential for steady and passive cash flow, you may have noticed increasing myths and misconceptions swirling around. There are a few DST myths that have, at best, caused minor confusion among new investors. However, there are others that must be debunked to avoid major issues or inflated expectations.
In this article, Realized 1031 debunks four common myths about Delaware Statutory Trust investments and discusses the actual facts behind them.
1. DSTs Are Only for Wealthy Investors
One of the most common DST 1031 myths is that these investments are only open to ultra-wealthy people. This misconception likely stems from the fact that DSTs can own institutional-grade property and only accept accredited investors.
- While some DSTs do own institutional-grade properties, you won’t need substantial funds to enjoy the benefits of the DST’s portfolio. You can begin owning beneficial interests for as low as $100,000 in some cases.
- It’s true that you must meet certain financial standards to become an accredited investor. However, the criteria aren’t as exclusive as you might think. Earning more than $200,000 within the past two years already qualifies you.
2. You Have No Control Over Your Investment
The rumor that you have a lack of control over your investment is false. In a DST, you own beneficial interests while the DST owns the underlying properties. In this structure, your investment is actually the interest and not the assets themselves.
To be more accurate, you lose control over the properties and landlord rights. This fact is more relevant to investors who previously had direct ownership of a property, which they sold to enter the DST via a 1031 exchange.
The fractional interests themselves are still within your control. In most cases, investors wait for the liquidity event to do anything with their investments. However, you are free to sell to a secondary market in case you need to liquidate before the holding period is over.
3. If the Sponsor Fails, the DST Collapses
A common worry is that if the sponsor runs into financial trouble, investors lose everything. Fortunately, DSTs are structured differently.
- The real estate is owned by the trust, not the sponsor.
- DSTs are designed to be bankruptcy-remote, protecting investors from the sponsor’s creditors.
- Successor trustees or managers can step in if the sponsor can’t continue operations.
Even so, a sponsor failing can cause issues with management and cash distributions. This fact means sponsor vetting and selection are crucial steps to take before committing your capital to a DST.
4. DSTs Deliver Consistent Returns
Unfortunately, this myth isn’t true. DST income is still highly dependent on the performance of the underlying properties. Cash flow is determined by variables like rental rates, tenant occupancy, and broader market conditions. When these factors are favorable, then there’s a chance for higher distribution. The inverse happens during unfavorable conditions.
Like every other investment, DSTs do not have any “guaranteed” performance. Understanding this fact helps you set expectations and avoid inflating your expected returns.
Wrapping Up: Debunking Delaware Statutory Trust Myths
DST misconceptions arise from the varied aspects of this investment vehicle, whether it’s the process, accessibility, expected returns, or structure. However, DSTs are not as opaque as many investors believe them to be. In-depth research and the guidance of an expert can help you get the facts straight and cut through the myths. With the right sponsor, advisor, and strategy, DSTs can be a valuable addition to a diversified real estate portfolio.
Sources:
https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors
