We have discussed the advantages of investing in Delaware Statutory Trusts (DSTs). But DSTs aren’t risk-free investments. Quite the contrary. DSTs are complex investment products, meaning you should consider multiple factors when finding – and selecting – the right trust to invest in.
Here’s what to consider when seeking out DST deals that make sense for your particular situation.
The DST sponsor is an individual or entity that creates the trust and issues the beneficial interests in that trust to you and other investors. The sponsor also handles assets, dispositions, financing, and operation of the DST’s underlying real estate assets. The sponsor’s importance in the DST operations means you must do your homework on the following:
Before investing in a DST, you’ll receive a private placement memorandum (PPM). Sometimes known as an offering memorandum (OM) or offering document, this document provides in-depth information about the investment and should offer enough data to make an informed decision.
The PPM should provide the following:
The trust’s properties. When you invest in a DST, you’re acquiring shares of a trust that buys, owns, and manages real estate. You need information about these properties, including their location, type, and lease status.
Investment structure. DSTs are real estate vehicles formed as separate legal entities. The PPM should outline the entity’s structure and how you acquire and hold beneficial interests in the trust.
Risks and rewards. DSTs can provide rewards like investment diversification and passive real estate ownership. But there are risks involved with these instruments, too. In performing due diligence on any targeted DST, it’s essential to understand the macroeconomic, regulatory, execution, and asset-level risks involved. Other factors to examine include fees and potential tax issues.
Hold length/exit strategies. DSTs have lengthy holding periods that can range up to ten years. You must know how long your capital will be tied up with this investment. At the same time, the PPM should outline the DST’s exit date and any consequences for an early cash-out.
Here are some additional thoughts when seeking out the right DST for your purposes:
Shop and compare. Googling “DST offerings” results in about 5 million results. You don’t have to analyze such a huge number. But it’s a good idea to compare different offerings – and their sponsors – before making an investment decision.
Consider diversification. One potential advantage of DSTs is that they can offer access to multiple real estate property types with a minimal investment fee. A DST that owns varied assets in various locations can help diversify your portfolio and potentially reduce your risk.
Longevity matters. When faced with a choice, working with DSTs operating for at least two years is better. Lengthier operation can mean a stronger income generating and cash flow track record.
Get professional advice. Consult with a knowledgeable financial advisor before deciding on a DST investment. This expert can determine your specific needs, investment goals, and risk tolerance. This can help you determine if a DST is right for you.