One undervalued aspect of Delaware Statutory Trusts (DSTs) is how they can specialize in one asset type or sector, allowing the investor to fully capitalize on the stability or growth of that specific niche. An industry that offers steady returns and long-term growth is senior housing, and now that the U.S. population is aging, DSTs concentrating on this asset class are more likely to encounter a few unique advantages.
Below, Realized 1031 shares insights that detail the benefits of DST senior housing as well as key considerations to keep in mind.
Quick Recap of Delaware Statutory Trusts
DSTs are legal entities that own underlying real estate property. These assets earn income, which is then distributed to investors who own beneficial interests in the DST. 1031 exchanges can be completed using DSTs, allowing investors to exchange the proceeds from the sale of their relinquished property for DST fractional interests, which then results in the deferral of capital gains taxes.
Qualifying DSTs must follow several rules, as outlined in Revenue Ruling 2004-86, to maintain tax-deferral status. These rules create the structure that allows other DST advantages to emerge, such as truly passive income and enhanced diversification. Overall, you (as an investor) are able to preserve your wealth, maintain exposure to the real estate market, and ease the burden of active management.
Delaware Statutory Trust Senior Housing: Why This Sector?
There’s a growing demand for senior housing in the U.S., creating new opportunities in the sector. Curious about the factors driving this demand?
- Aging Population: Every day, around 10,000 individuals in the U.S. turn 65.
- Longevity: Seniors tend to live longer due to higher average lifespans in the country, so there’s a steady client base for senior housing assets.
- Diverse Care Need: From independent living to memory care, the spectrum of housing types ensures ongoing demand.
These factors create conditions that make senior housing stable, even in inflationary environments or during periods of market uncertainty. Thus, the sector can be leveraged as a hedge against inflation, making it extra appealing to investors.
Benefits of DST Senior Housing Investments
Among the various investment vehicles out there, why choose DSTs in particular? Here are some of the advantages offered by this strategy.
- Tax Deferral: When paired with 1031 exchanges, DSTs allow you to defer capital gains taxes and preserve more of your equity.
- Professional Management: Senior housing properties have complex operations that are difficult to manage through direct ownership. A DST sponsor, especially one specializing in this sector, has the systems and strategies in place to ensure smooth operations.
- Diversification: DSTs allow investors to spread capital across multiple facilities or regions, reducing exposure to local market fluctuations.
- Access to Institutional-grade Investments: Acquiring a senior housing asset can be difficult because of the high upfront cost. DSTs provide access to these institutional-grade assets with as little as $100,000, giving investors a chance to earn income from such properties.
DST Investment Senior Housing: Risks To Consider
The senior housing sector is generally more stable than other types of investments. However, this doesn’t mean that the asset class is totally immune to factors like market downturns. While demand is strong, local oversupply or shifting demographics can always affect occupancy rates.
There are also challenges within the DST structure itself. For one, you lose direct control of the real estate assets, which may not be suitable for some investors. DSTs also have a holding period that may last for up to a decade, making them illiquid investments.
Conclusion: DSTs for Senior Housing
Senior housing truly does bring together the best characteristics of the real estate and healthcare sectors. When accessed through DSTs, this asset class can provide resiliency, tax deferral, and passive income that make them powerful additions to your portfolio.
Sources:
https://www.aarpinternational.org/initiatives/aging-readiness-competitiveness-arc/united-states
