Many investors want assets that offer long-term stability and resilience, and medical properties are one of the asset classes that can accomplish both. There is one more strategy that adds benefits like tax-deferral and passive income: accessing medical real estate via DSTs. In this guide, Realized 1031 showcases how investing in medical properties through Delaware Statutory Trusts can become a powerful strategy.
Refresher on DSTs
DSTs are investment vehicles that own an underlying property. As an investor, you enter by acquiring fractional interests. As the properties generate income through activities like renting, the funds will be distributed to investors on a current basis. DSTs are also eligible for 1031 exchanges thanks to Revenue Ruling 2004-86. This qualification created more rigid structures for DSTs. For example, only the sponsor is allowed to make any decisions or have direct control of the properties’ operations and management.
However, the structure provided additional benefits that made DSTs popular. Hands-off involvement, truly passive income, and deferral of capital gains taxes are some of these advantages.
Why Healthcare Real Estate?
The demand for healthcare real estate is on the rise. While this sector will always be covered, there’s an increasing desirability due to various factors, such as the country’s aging population, longer life expectancies, and the shift from inpatient to outpatient care. As such, verticals like urgent care clinics, imaging facilities, and medical office buildings are experiencing expansion.
Apart from the growing demand, healthcare facilities usually have long-term leases, with tenants investing heavily in their buildouts. This tendency makes them less likely to relocate, allowing property owners to avoid the headaches of vacancies. Plus, healthcare providers are usually creditworthy tenants with services deemed essential, increasing the potential of strong performance even during market downturns.
Advantages of Investing in Healthcare Real Estate via DSTs
While acquiring healthcare property is already a strategic move for your portfolio, doing so through a DST offers a few more benefits. We’ve already mentioned tax-deferral through 1031 exchanges as well as passive income, but here are a few more you can expect.
- Easier Access to Assets: Healthcare facilities require huge capital to acquire, and you may not have enough upfront cash for it. Thankfully, you can pool funds with other investors through a DST and purchase an asset you normally won’t have access to.
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- Professional Asset Management: DSTs are managed by experienced real estate sponsors who handle everything from tenant relations and maintenance to compliance and reporting. Investors benefit from institutional-level management without active involvement.
- Diversification: Healthcare property investments are considered generally safe. Having a medical property DST in your portfolio adds another level of protection against market risks, especially since the DST can own multiple assets across various sectors or regions.
Possible Risks to Keep in Mind
As with any kind of investment, there are a few risks with DSTs. Understanding how the following can impact your goals can help you assess whether DSTs are the right choice for you.
- Illiquidity: DSTs have holding periods, and you won’t be able to liquidate your interests until the date arrives.
- Loss of Control: Since the sponsor assumes all of the responsibility, you lose control of management, operations, and capital decisions. This characteristic may not be suitable for investors who still want some level of control.
- Market Risks: While healthcare is resilient, localized factors like regulatory changes or hospital closures can impact tenant stability.
Wrapping Up: Why Invest in Delaware Statutory Trust Medical Properties
Medical property DSTs combine the reliability of healthcare real estate with the tax deferral and ease of passive investing offered by DSTs. With the continuing demand for medical services, these investments offer an attractive path for those seeking steady income, long-term stability, and hands-off ownership.
Sources:
https://www.grandviewresearch.com/press-release/global-healthcare-real-estate-market
