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.

[Andrew Hogan]

@Jared Friedman I'm not a CPA, but I do know of several people who traded up their smaller properties for a portion of a larger MF deal and, in turn, got the same effect of a 1031 because of Cost seg, bonus depreciation, and accelerated depreciation. They just had to reinvest within a calendar year. 

[Alina Trigub]

@Jared Friedman

If you have significant gains, consider investing in opportunity zones. 

In terms of passive investments, look into investing in NNN lease, DSTs, or do a TIC with someone who wants to do most of the work on a property. You can also consider offering to the buyer to do a sale that is prolonged over extended period of years to defer paying taxes in full at once. You should discuss various options with your CPA.

[Keith Baker]

I am all interested in DST's and would like some guidance on learning all the details and how to locate reputable DST Sponsoring Companies.

[Matt Ward]

Find some TIC Syndications.

[Natalie Kolodij]

Originally posted by @Keith Baker:

I am all interested in DST's and would like some guidance on learning all the details and how to locate reputable DST Sponsoring Companies.

DST companies I personally vetted:

Inland 

Pasco 

Inland was around before the 08 crash and survived, we went from like 40 DST companies to like 3 or something crazy like that. I'm a big Inland fan. Obviously this is not legal advice, do your own Due Diligence, but I'd personally invest with either of those companies.

[Keith Baker]

What are good sources of information to locate the various DST property offerings?

[Matthew Ryan]

@Jared Friedman - I'd recommend that you also look at Opportunity Zones Funds: more flexibility than 1031 and you can completely avoid capital gains on any new appreciation. 

[Mark Creason]

@Matthew Ryan

I would respectfully disagree with you on OZFs having more flexibility than other 1031 options.  In a typical OZF, you will be placing your funds into a deal where you will most likely see little to no cash flow in years 0-3.  Most funds will not be paying out as they will use cash flow to construct or substantially renovate a project.  They will need time to stabilize the project.  Most of the funds are going to have 10 year timelines if not longer.  It makes sense to hold 10 years to eliminate the cap gains on the project, but you are tied up for a long time.  You also have to hold money to pay your taxes in year 7 on your original cap gains from sale.  The taxes are deferred until this point, but then have to be paid.  I do think an OZF makes sense for some people but I do not believe they offer more flexibility than most 1031 options.

Mark

[Lauren Speidel]

@Jared Friedman I would speak to your financial advisor about Delaware Statutory Trusts (DST) or Syndicated Tenant in Common property interests (TIC). They are extremely passive investments but are like-kind to real estate so you could complete a 1031 Exchange and reinvest into one of these structures. There are some differences between the two, for example with a DST you can have an unlimited amount of investors while with a TIC you are only able to have 35. Both are very illiquid and I would expect a hold time of 5-10 years as there is no secondary market for these investments. With a DST the investor has no voting rights and the real estate sponsor decides when to liquidate the portfolio or properties within the portfolio. With a TIC, all investors have voting rights which can be beneficial for some and not for others. There are other differences that you should be aware of but you also must be an accredited investor with a million dollar net worth not including your primary residence. Let me know if you'd like to discuss these further. I worked for the largest Nationwide DST and TIC sponsor for 10 years before moving over to the Qualified Intermediary side.