Joining a Delaware Statutory Trust (DST) can be a tax-deferred strategy for real estate investors using a 1031 exchange. By buying fractional interests using proceeds from a 1031 exchange, you may defer capital gains taxes and potential for passive income from institutional-grade assets. Since you don’t have direct property ownership, you can also enjoy a more hands-off involvement in the DST.
Still, not all DSTs are equal. One important aspect of this investment strategy is the broker you choose. A Delaware Statutory Trust broker serves as the licensed financial professional who helps investors evaluate fractional ownership interests. Given the importance of this role, investors should seek out a DST broker who is certified, experienced, and knowledgeable — not just with the process but with your specific needs.
In this guide, Realized 1031 shares the key characteristics to look for in a DST advisor or broker and the red flags to avoid.
The Role of the DST Broker
DST brokers are securities-licensed professionals who specialize in offering Delaware Statutory Trusts as 1031 exchange-eligible investments. While they are not real estate agents, DST brokers bring real estate investment knowledge alongside the regulatory expertise required to evaluate and present securities-based real estate offerings. Here are some of a DST broker’s key responsibilities.
- Analyze Investor Objectives and Risk Tolerance: A DST broker should understand your investment goals, risk tolerance, and other aspects to create a full picture of your financial situation and which DSTs may be suitable for your overall strategy.
- Find Pre-vetted DST Offers: Your DST broker should be able to select DST offers and connect you with sponsors so you can begin evaluating your options.
- Assist with 1031 Exchanges: Given the strict rules surrounding like-kind exchanges, DST brokers can help investors navigate the rules, including coordination with qualified intermediaries.
- Guidance for Joining the DST: Since DSTs are passive investments — meaning limited property management is required by you— a broker’s expertise can be important in navigating the structure, fees, and long-term expectations of the asset.
Five Things To Look for in a DST Broker
Given the important role of the DST broker, finding a well-qualified one is a key part of managing risk and aligning with your investment goals. If you’re just starting out, here are a few characteristics to look for when choosing your DST advisor.
License and Credentials
Before anything else, confirm that the DST broker has the appropriate securities licenses. These typically include the FINRA Series 7 or Series 22 license, along with a Series 63 or 66 for state registration. These credentials indicate that the broker is authorized to offer securities products such as DSTs and is subject to regulatory oversight. You can verify a broker’s licensing and disciplinary history using FINRA’s BrokerCheck.
Strong Track Record and Reputation
Experience matters, especially when it comes to complex, tax-sensitive investments like DSTs. Look for a broker with direct experience in the DST space. While past results do not guarantee future outcomes, a broker's history of working with similar investors may help you assess their process, transparency, and professional approach. Ask for client testimonials, case studies, or references that speak to their professionalism and results. A reputable broker should be transparent about their performance history and willing to share how they’ve helped other investors meet their goals.
Thorough Due Diligence Process
DST offerings or private placement memorandum carry a lot of information. Any DST broker worth their salt must be able to dig deep and see things that may not be obvious in the offering at first glance. This due diligence helps them gain a deeper understanding of each offering and how they may suit your needs. Plus, rigorous offering assessments help protect investors from unnecessary risks. Areas that a DST broker should look into include the following:
- Asset Quality
- Location
- Lease Terms
- Tenant Creditworthiness
- Market Outlook
Investor-centric Approach
An effective broker will take the time to understand your financial situation rather than offering one-size-fits-all solutions. Find one that is keen on understanding aspects such as the following.
- Risk Tolerance
- Income Needs
- Estate Planning Goals
- Long-term Investment Strategy
Importantly, they should take the time to explain the pros and cons of each offering in plain language. This characteristic is a marker of a broker who wants to empower you to make informed decisions instead of obscuring issues with technical language.
Clear and Consistent Communication
Finally, you’ll want to work with a DST advisor who can maintain clear lines of communication. Given the strict timelines of 1031 exchanges, having a broker who is accessible is important. You should also find a broker who can provide ongoing communication even after you join the DST. With consistent support, you’ll have access to performance updates and get answers for any concerns down the road.
Four Red Flags To Watch Out For
While there are many trusted DST brokers around, not all of them may have your best interests in mind. Some may be looking to get a quick commission, and some may practice unethical behavior to push certain DST products that may not fit your investment goals. Here are a few cautionary signs to keep an eye out for.
- Lack of Licensing or Transparency: A properly licensed DST broker should hold applicable FINRA credentials (such as the Series 7 or Series 22) and be affiliated with a registered broker-dealer. If a broker hesitates to provide proof of licensing or avoids questions about their professional background, this may be a cause for concern. You can verify credentials independently using FINRA’s BrokerCheck.
- High-pressure Sales Tactics: You may find some DST advisors who try too much to convince you to join a certain DST. These investments are complex and often involve a significant portion of an investor’s net worth. A reputable broker will give you time to review offerings, ask questions, and consult with your tax or legal advisors. Anyone who pressures or emotionally manipulates you into a deal should be avoided.
- Limited Selection: Be wary of DST brokers who can only show one or two listings, pushing for these sponsors without explanation. This issue can come hand-in-hand with high-pressure sales tactics, and it could indicate that the broker has a limited network and a lack of access to a broader range of offerings. A reputable broker should be able to provide a wide selection of appropriate options.
- Avoids Discussing Risks: If a broker only highlights the potential income and tax benefits of a DST and skips over liquidity concerns, market risks, and exit strategies, that’s a red flag. DSTs are illiquid and not suitable for every investor. A qualified broker will give you the full picture, not just the sales pitch.
Wrapping Up: Selecting the Best DST Broker
Engaging with professionals for guidance in a DST transaction is critical. A DST broker can help you evaluate available offerings and guide you through the investment process. Look for professionals who hold appropriate credentials, have relevant experience, maintain access to a range of DST sponsors, and communicate clearly throughout the exchange. These qualities can support a well-informed investment process that aligns with your goals and risk tolerance.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
https://www.investopedia.com/articles/financialcareers/07/securities_licenses.asp
