Best passive investments for a 1031 exchange

[Jared Friedman]

I’m selling my California rental property and need some ideas on where to deploy my money. My place is worth $425k and I have a $72k mortgage. After realtor fees etc I should probably wind up with about $310-$320k cash in hand and I will need to purchase at least $425k worth of properties so I’ll need to use some leverage.

Other than turnkey rentals what are the best options for passive investments? Are there any reputable crowdfunding sites that allow 1031 exchange funds? What have others done that want the least amount of hassle in the real estate investments?

[Maureen McCann]

@Jared Friedman Have you looked into DSTs? The IRS approved them for use in a 1031 exchange in 2004 and they are, by law, extremely passive. However, they usually require that you leave your capital in place for 5-10 years, and you'll have no control (again legally) over the investments held in the DST. It's essentially like investing in a mutual fund of real estate, but you can't typically just sell your shares whenever.

Do some research because there are certain things not everyone likes about DSTs - they can't raise new capital once the DST offering is closed, so big ticket repairs on props held in the trust can eat into returns, just like with any REI, but you don't have any control over how and when repairs etc are dealt with. So if you want truly hands-off and you're ok with your capital being tied up long-term, a DST might be a good way to go.

Not able to tag for some reason, but Dave Foster is a good resource for all things 1031.