For investment property owners seeking a hassle-free way to maintain their real estate exposure, passive real estate investments offer an appealing array of options. Among the most prominent choices are Real Estate Investment Trusts (REITs), Delaware Statutory Trusts (DSTs), and Interval Funds. These vehicles allow investors to participate in the real estate market without the day-to-day demands of property management.
REITs are often favored for their liquidity and accessibility. Publicly traded on major exchanges, they allow investors to buy and sell shares similarly to stocks. This liquidity means investors can enter and exit their positions relatively quickly, an advantage not shared by other real estate investments. However, this correlation with the broader stock market can also be a double-edged sword, introducing volatility that more stable property investments might not experience.
REITs function by managing income-producing real estate, and they're required to distribute at least 90% of taxable income to shareholders. This makes them attractive for those seeking regular income, although it's important to note that dividends are typically taxed as ordinary income.
DSTs provide a different approach, well-suited for those looking to defer capital gains taxes via 1031 exchanges. A DST allows multiple investors to pool resources and own fractional interests in real estate properties, often commercial buildings. The IRS treats these interests as direct property ownership, making them eligible for 1031 exchanges—a method used by property owners to defer tax liabilities on sales.
The primary appeal of DSTs lies in their straightforward income potential and tax deferral benefits. Sponsors handle all the management, freeing investors from active involvement in the property's day-to-day operations. However, DSTs are typically long-term holdings and are less liquid than REITs, which might not suit those needing quick access to their capital.
Interval Funds are a lesser-known but increasingly popular option, blending features of mutual funds and real estate investment. Unlike traditional REITs, which are continuously traded, Interval Funds allow for redemptions only at specific intervals—typically quarterly. This limited liquidity can foster a more stable return, as it insulates the fund from sharp market fluctuations.
Interval Funds often invest in a diverse portfolio of real estate assets, providing broad exposure across different property types and geographic regions. This diversity can help mitigate risk while offering the potential for income and growth.
Deciding between these options depends on individual risk tolerance, investment timeline, and liquidity needs. REITs are ideal for investors seeking liquidity and steady income but willing to accept market volatility. DSTs suit those prioritizing tax benefits and stable income over the long term. Meanwhile, Interval Funds offer a middle ground, balancing liquidity with the broader reach of diversified investments.
For investment property owners exploring these passive options, it's crucial to conduct thorough due diligence, understand the specific characteristics of each vehicle, and align investments with financial goals. Consulting with financial advisors can provide personalized insights tailored to individual investment strategies. By leveraging these diverse options, investors can maintain their real estate presence while reducing the hands-on demands that accompany direct ownership.