Projected 1031 DST Cash Flows

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Projected 1031 DST Cash Flows

Warren Anderson
Chico, CA · Member since 2018 · 1 post · 0 votes

New guy here; nice to meet everyone.

I've owned a six-plex in California for 30 years; no shelter left; almost no debt. Income vs equity is unattractive. I'm close to retirement. I want get rid of the property and get uninvolved; maybe  move away. Cap gains are brutal and a normal 1031 won't meet my needs. DSTs seem attractive. I've looked at several offering packages; but I cannot figure expected cash flows. Maybe somebody could illustrate. 

Here's a theoretical (non-personal) examplel: $250,000 buys a 1% share in the offering (say, a seasoned, Texas residential apartment building). Leverage is 50%. Setup load is, say, 12%. DST term is projected as five years; inflation is expected to be 2%/year. Projected yield is 6%. The first step is easy: I put up a quarter million bucks.

Assuming that everything goes as planned, What would the purchase price of the property be? What would my cash flows be? (say annual disbursements)?

Thanks

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  • Johnny Borrelli
    Financial Advisor · Los Angeles, CA · Member since 2018 · 77 posts · 7 votes
    8y

    @Warren Anderson lets set up a call.  I can help you through those questions.  There is a company that does billions of dollars a year in these transactions.  I can get you the info and help you with yours if you like.

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  • Jon Jacob
    Member since 2020 · 1 post · 0 votes
    6y

    Curious about how this went.  I am just starting to look into it and wondering exactly the same.   Did you pull the trigger and if so, how did it go?

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  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    @Jon Jacob.  You may want to reach out to @Dave Foster or to me to understand how this could work in a 1031 exchange and a DST. We can explain this and discuss options. @Warren Anderson, I hope you're still around on BP and can share what you actually did and how it worked out.  

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y



    "$250,000 buys a 1% share in the offering (say, a seasoned, Texas residential apartment building). Leverage is 50%."

    What would the purchase price of the property be? Ostensibly with 50% LTV, then you're in for $500K = 1%. So price paid would be $50M.

    "Setup load is, say, 12%"   Some syndicators play games. They may buy it for $48M and then take the remaining $2M from investors and keep it for reserves or payout to make sure the first years (when they're doing rehab) cover your payback. The 12% set up fee makes me nervous as he!!.

    "What would my cash flows be? (say annual disbursements)?"

    Well if they project 6%, they're HOPING to give you a check for $15K (=6% of $250K) each year.

    If this is a DST, good luck. Most of the guys selling these are investment advisors and have NO clue about the underlying commercial real estate. Not saying they're all bad, but finding out reasonable assumptions is tough.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Warren Anderson, old thread but @Jon Jacob and @Paul Moore have revived it :). Typically, the good DSTs will put the fees into the back side. Your cash buys that actual interest in the DST. What makes these very handy in a 1031 situation is that there is almost always institutional debt already placed on the property owned by the DST. The investor has to assume their pro rata share. But they don't have to apply or qualify for it. And the debt is non-recourse to the investor and only secured by the asset.

    This makes these perfect for the 1031 investor who's needing to go passive and at the same time shed some personal risk. Or the active investor who's simply over leveraged. Toss some money into a DST and free up that borrowing power - but without paying any tax on profit because of the 1031 exchange. And the bonus is you still have some back end spiff, the ongoing depreciation benefit, and the opportunity to 1031 again when the dst sells - either into another DST or back into wholely owned real estate. A much easier transition than the big bite of moving right into NNN.

    So in Warren's example his $250K of cash placed in a 50% leveraged DST would buy him $500K of the asset. Cash distributions in most cases are based on cash in as income covers debt service. So his $250K of cash would be projected to pay him approx $1250/mo minus whatever administration fee there is.

    If you want IRRs you've got to dig into the prospectus further. But in addition to that cash flow you would receive at the sale of the DST 1% of amortization and 1% of appreciation and have received 1% of depreciation minus the

    fees of course.

    Sometimes fees can be high.  That's something to look for.  But you also don't want to forget that many of these fees would be in any real estate you purchase anyway - There's going to be commissions on sale and buy.  The sponsor took the risk to purchase, stabilize, leverage, and operate the property so there's profit to go to them just like if you bought an improved performing duplex.  Etc Etc.  

    What I see it usually is that these are only tenable emotionally for those with leverage issues or those who recognize the value of their time in other endeavors.  To todays breed of active dirt under your nails  investors the lower returns represent a loss of revenue that could be theirs if they had control.  That's the price of passive.  

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