The Benefits of Investing in a Delaware Statutory Trust with Other Investors

DSTs (Delaware Statutory Trusts) provide investors an avenue for 1031 exchanging into investment properties. It can be difficult to find a viable 1031 exchange property. Because DSTs are 1031 exchange eligible, they have a fairly large pool of potential properties to exchange into.

DSTs also require multiple investors. You aren’t likely to find yourself as the only investor in any DST. Is there some benefit to having multiple investors in one DST? Let’s dive into this question to find out.

Is One Investor a Choke Point?

Certainly, an investor can simply purchase a rental property rather than invest in a DST. They will receive full income, tax expense deductions, and depreciation. Of course, this investor will also have to manage the property on their own. They will have to come up with all the necessary capital. The investor will take on the full risk of this property since they are the only investor.

Additionally, the investor will have to first find a good rental property. This can be one of the most difficult components of the entire process. Finding a good rental requires a lot of research into location, demographics, the potential for rent increases, an inspection of properties, the potential for appreciation, and more. 

Yes, one person could do all of this, but it is very time-consuming and can be risky. Wouldn't more eyes analyzing potential properties be better? What about an experienced team? To afford such resources requires more funds, which means more investors. 

The Benefits of More is Better

So why would more people investing in a DST be better than just one person investing?

DSTs use Sponsors to find and purchase properties. Sponsors can be one person but are often firms. These firms have experienced teams who do in-depth analyses of properties. Once a property has been identified, the sponsor buys specific real estate assuming it can sell trust (i.e., DST) interests to multiple investors.

Because of the Sponsor's assumption (projection of multiple investors), investors are typically able to buy ownership of institutional-quality assets. Some Sponsors may purchase one property, but commonly, a DST contains multiple properties, whether one or more properties, they are institutional-quality. A single investor isn't likely to have the resources to obtain such properties.

No one investor owns the assets or trust. DSTs are designed so that no one investor has complete control or ownership of the DST. In fact, the DST is a passive investment. It is the Sponsor who manages all properties in the DST. The Sponsor has a mandate to fulfill, which investors know before investing. There's no risk that one investor will decide to do something detrimental, jeopardizing the entire investment.

DSTs are open to a broad range of investors since there's typically a low barrier to entry. These low barriers provide the opportunity to bring in more investors.

What happens if a lot of investors decide to pull money out of a DST? Does this cause the NAV (net asset value) to drop sharply? Actually, that isn’t a scenario that is likely to play out. Many DSTs have minimum holding periods of 3 to 10 years. Because there aren’t any investor transactions during the holding period, volatility often remains low.

Whether a DST is right for you depends on your financial goals and specific situation. Working with a financial advisor can help determine if a DST might be the right fit.