Our previous blogs outlined the various potential benefits of a Delaware Statutory Investment (DST), especially in the role of a 1031 exchange replacement property. DSTs can help with portfolio diversification, allowing you to acquire fractional shares in high-quality real estate you otherwise might not be able to afford. They’re also passive investments. As a DST beneficiary, you don’t have to worry about managing real estate or obtaining mortgages. The DST sponsor takes care of it all.
But one drawback of a DST investment is that they’re difficult to sell quickly. If you’re considering putting your funds into a DST, be prepared to hold that investment for at least five to seven years to receive a fair price.
So, how liquid is a DST? Not very liquid at all. Here’s why:
- No public market. There is no centralized market for buying and selling DSTs. There are no public exchanges. Disposing of your DST shares requires doing the legwork and finding a potential buyer (an accredited investor) through a secondary market. Even after all that, there’s no guarantee that you’ll find a suitable buyer to take on your shares.
- No specific price point. There’s no set price available for your DST shares. This is because the price varies depending on overall market conditions, the value of the underlying real estate assets, and the DST’s performance.
- No assurance of an ideal rate of return. Even if you’re fortunate enough to find a buyer, there’s no guarantee you’ll get the return you anticipated from the sale of shares. If you need to sell your DST shares quickly, you might have to sell them at a discount to the fair market value.
- Potential tax liability. Assuming you’ve found the accredited investor interested in buying your shares, that sale could trigger a taxable event in addition to a possible reduced return on your investment. You could be taxed at an ordinary income or capital gains rate, depending on how long you hold your shares.
The takeaway from this discussion is that when investing in a Delaware Statutory Trust, consider DST liquidity. These investments are, in fact, highly illiquid. As such, before determining if this is a good path for you, understand that your funds will be tied up for several years. Be sure you can afford to hold the investment over the long term.