For accredited investors participating in a 1031 exchange, Delaware Statutory Trusts are a worthwhile investment option to consider. However, some investors are unaware that DST cash investments are also a viable option.
DSTs may provide a number of advantages to investors engaging in a 1031 exchange, including the possibility to postpone the realization of capital gains from the sale of investment real estate and the avoidance of some of the risks involved in finding a replacement property quickly.
However, there are additional potential DST advantages that can benefit investors as a complement to either outright real estate ownership or stock market trading.
Have your money working for you - DSTs are professionally managed by asset managers and property managers who are responsible for ensuring that the tenants pay their rent on time and delivering the investor a check, often every month (assuming funds are available). You never engage with any of the tenants and have no management duties as an investor.
It's wonderful to make an investment and see it pay off. What if it doesn't, though? Any investment has the potential to experience losses, whether it be in real estate, equities, futures, commodities, jack's magic beans, etc. However, the risk is spread out when one diversifies their portfolio by making investments in several different things.
Investors have access to a variety of DST real estate investments from different DST sponsors, including multifamily, storage space, commercial, and NNN leases. Additionally, you can invest in a specific type of DST, like multifamily, across a number of different geographic areas of the nation, increasing the likelihood that other locations won't experience a downturn in their local economies or, at the very least, lowering the likelihood that they will due to diversification.
The fact that real estate is permanently anchored to the earth makes it one of the reasons why so many investors adore it. Real estate also has an inherent value, which means that it is fundamentally a hard asset with at least some minimal value, as opposed to a firm, whose shares can possibly lose all of its value should the latter go bankrupt. Uncovered natural disasters and foreclosure are always a possibility, but as was already mentioned, no investment is without risk.
The stock market can be unpredictable, as we've recently witnessed during the coronavirus pandemic. On other days, market volatility in the double digits have been the norm. The link between real estate and the stock market, however, has historically been smaller. Real estate is typically much less affected by market turbulence than the equity markets, but that doesn't mean it can't be volatile and experience a downturn like we did during the Great Recession of 2008–2009.
Real estate is a popular way to possibly accumulate money and has several advantages as an asset type. Real estate, however, is not created equal. Real estate is similar to how there are blue-chip stocks and "junk" bonds. There are DSTs that allow investors to purchase "institutional-level" real estate, which is generally real estate that is thought to be of a certain grade and class such that huge institutions and significant investment funds would consider it. The majority of people would find it challenging to access these kinds of real estate investments on their own, but the DST structure enables them to indirectly hold a portion of these investments that they would not otherwise be able to.
Sometimes as little as $25,000 can be invested directly in a DST as the minimal amount. This gives them access to DST real estate assets that would normally cost millions of dollars to acquire, finance, and operate on a fractional basis and is not a princely sum for the majority of accredited investors.
Investors who buy in equities, for instance, must pay capital gains taxes on any profits they make (note: Opportunity Zones may provide an option to defer those gains). However, under the current IRS code, investors have the choice to do a 1031 exchange into another property into which they own 100% or another partial DST, so delaying any capital gains, once a DST asset has been sold. Of fact, if President Biden's economic plan is approved, changes to the IRS rules, such as those under it, could alter how future earnings are treated.
In contrast to buying a property directly and potentially needing to obtain financing from a lender, DSTs provide investors with non-recourse loans that are not dependent on the investor's capacity to obtain financing.
Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure:
No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood, and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward-looking statements are never an assurance of future results.
Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read, and understand all the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.
Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.
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