If you own an investment property, exchanging it into a real estate portfolio can help you diversify your wealth. Moving from a direct property management model to a portfolio of fractional real estate ownership can provide you with diversification and access to different kinds of properties you may not be able to access on your own.
Learn how to exchange your investment property into a real estate portfolio and why using a 1031 exchange strategy can help you diversify your wealth to seek continued growth.
Benefits of Building a Real Estate Portfolio
When you initially purchase a real estate investment property, you may simply intend to collect rent to make a passive income. While this can net you profit over time, it comes with property management challenges like collecting rent, maintaining the property, and managing tenants.
This type of investment model can limit your investment potential and doesn’t build up your real estate portfolio. Moving from a property management structure to a diversified investment approach may yield multiple benefits, including:
- The potential to seek steady cash flow
- Passive property management
- Investment diversification
- Tax benefits
Transitioning Out of Property Management to a Real Estate Portfolio
One option for transitioning out of a limited property management investment to a diversified real estate portfolio is to use a 1031 exchange. A 1031 exchange allows you to transfer investment property sale proceeds into a like-kind asset and defer capital gains taxes during the process.
This strategy lets you keep more of your wealth working for you toward new investments. It also helps you build your real estate portfolio by allowing you to roll your proceeds over into a new investment venture like a Delaware Statutory Trust (DST).
A DST is a type of investment that allows you to acquire fractional ownership into commercial properties that you may not have the funds for on your own. DSTs also provide you with the potential to seek passive income. Examples of DST properties include:
- Multi-family apartment buildings
- Medical offices and retail properties
- Industrial facilities
- Self-storage properties
With a DST, you can diversify your real estate portfolio, which may lead to more investment opportunities.
How to Invest in a DST?
If you are considering a DST, you have a few different options. Opportunities include purchasing from a DST Sponsor, acquiring a DST in a resale venture, or conducting a 1031 exchange on an existing investment property.
To purchase a DST security from a Sponsor, partner with a broker-dealer who works in the industry and is familiar with DST Sponsor opportunities. A qualified broker can vet potential DST Sponsors and contact you when a suitable investment venture arises.
To acquire a DST through a 1031 exchange, work with a real estate tax professional who can guide you through the process. Several requirements surround 1031 exchanges, including property identification, fair market value, and closing date allowance. A professional can help ensure your 1031 exchange goes smoothly and results in acquiring the DST property.