Real estate has always been considered a cornerstone of wealth-building, and entering this sector means building a portfolio of diversified assets. First-timers have plenty of options available to them, and some find themselves drawn to Delaware Statutory Trusts (DSTs), which offer benefits including passive income and enhanced diversification.
Still, is a Delaware Statutory Trust right for first-time real estate investors? Is joining a large-scale institutional-type investment the best practice for the inexperienced? Below, Realized 1031 shares some insights.
All About DSTs
DSTs are trust entities that own income-generating properties, acquired using the pooled capital of DST investors. As an investor, you own beneficial interests in the DST and earn the proportional amount of income. When acquired through a 1031 exchange, DSTs also allow you to defer capital gains taxes. However, 1031 exchanges don’t apply to this discussion since real estate first-timers have nothing to exchange yet.
In a DST, only the sponsor has control over the management and operations of assets. As such, your direct involvement isn’t needed. This feature makes DSTs sources of truly passive income. However, the lack of control does present a few implications that may impact newbie real estate investors.
The Appeal of DSTs for First-time Real Estate Investors
The structure of DSTs, as well as other features unique to this type of investment, can make them highly attractive to first-timers.
- Low Barriers to Entry: Many DSTs allow investors to invest as low as $100,000 into the trust entity to acquire beneficial interests. This low barrier to entry makes things easier for newbies, but keep in mind that you must be an accredited investor to enter one.
- Passive Income: Direct ownership entails management burdens that first-time investors may not be equipped to handle. When investing in a DST, you won’t face this issue, allowing you to earn truly passive income.
- Immediate Diversification: Instead of having to build up your real estate portfolio over the years to increase diversification, entering DSTs immediately can allow you to gain exposure across numerous real estate sectors and geographic locations.
- Access to Institutional-grade Assets: First-time investors can own a share of assets typically reserved for large funds and seasoned developers.
Possible Drawbacks and Challenges
Like all other investments, DSTs are not risk-free. One of the significant drawbacks is the holding period, which traps your capital for five to seven years or more, based on what the private placement memorandum outlines. If the need for liquid cash arises, then you may need to find other sources.
Another drawback is the lack of control. For some first-timers, being involved in management decisions, leasing, and financing is necessary to learn the ropes and become more knowledgeable regarding how real estate investing works.
Finally, there’s the fact that DSTs can only be accessed by accredited investors. First-timers may not have this status yet, needing more income or a higher net worth. Together, these drawbacks may feel restrictive to inexperienced investors, especially those looking for flexibility or quick access to their capital.
Wrapping Up: DST First-time Investor Considerations
When evaluating DSTs as a new real estate investor, understanding the pros and cons can help you decide if this strategy meets your needs. Can you give up direct control for passive income? Can you endure the long holding period for the chance of stable cash flow and immediate diversification? Are you an accredited advisor? Knowing your priorities will help you enter a DST with confidence and enjoy the potential rewards of owning real estate assets.
Sources:
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors
https://finance.yahoo.com/news/real-estate-investors-know-delaware-115500132.html
