DST(Delaware Statutory Trust )

[Michael Beur]

Hello to everyone

Is anyone familiar with DST? Has anyone used it in the past or currently and which sponsor been used and how has the outcome and experience been?

I am in the process of selling few of my rentals and do 1031 exchange into DST's

Thank you in advance

Michael

[Matyas A. S.]

We bought into DST-s this year as part of 1031 exchanges. I liked the process and I am hopeful that this will work out long term. Ask me in 10 years! I am a mathematician with actuarial background and I do not mind reading the 250+ page private placement memoranda documents. I got lucky that I found a financial advisor who is a fiduciary. He was available for lots of conversations and helped our selections. We are diversified across geography and sponsors. We considered commercial and storage sector but ultimately we stuck to multifamily.

We invested in 2 multifamily deals using partnerships prior to going to the DST route. One of the multifamily deals was a great success in 1.5 years (originally planned for 4-5) the other is still ongoing in its 2nd year and it is performing somewhat below plan/expectation (but no a major concern).

Initially, we wanted to 1031 into another such multifamily deal, but I quickly learned that is a no-go, because partnership interest is 'not like' real estate ownership. With the 45 day deadline coming up I gave myself a crash course on DST-s and invested with Inland.

Then, shortly after a second single family home had a similar issue: the tenants separated and we let them out of the lease early. Considering that the 10/1 ARM mortgage on it with the ultra low 2.5% interest rate was in its last year, we decided to 1031 this as well into DST-s.

Here are the pros and cons as a I see them:

PROS:

* Quick closing (3-5 days!)

* Better diversification can be achieved (with little work). (A single family home can suffer one bad tenant incident which could tank your returns. Harder to own in multiple markets.)

* Completely passive investment. No calls regarding broken water heater. No need to deal with dog chewing up the place etc. No hassle over finding tenants.

* Simpler record keeping. DST sends replacement 1099 at end of year. No need for you to keep track of handyman, legal, travel, etc. expenses. No need to send 1099-s to contractors.

CONS:

* Intimidating PPM documents. Some may never get comfortable reading these. I found in one a disclosure stating that a broker who was selling shares has been convicted a few years prior for operating a ponzi scheme. I can totally see that after reading that some investors just run the other way.

* While record keeping is simpler for operating expenses, depreciation must be tracked by investor and can be a challenge to some. (I intend to tackle this myself, because I do not trust others with my money, but if I have to, I will hire an accountant to help.)

* You need to file state tax return in each state you own that has state tax!! (This is what makes Florida, Texas etc. favorite locations for DST-s.) Make sure you have your taxes very much in order prior to doing this, because refiling taxes in multiple states will be a pain.

* You probably can get better return with other multifamily investments that focus on improvements and value-add. DST-s cannot make significant improvements to the property (per the IRS private letter ruling). DST-s will never offer an investment to buy land and build on it and sell for example. Of course, new appliances and carpet, wood floor, countertop is allowed. (This is my understanding.)

* DST-s are new and not well tested in (tax) court. Lot's of other risks, see the PPM where they discuss these risks over several pages. DST-s started in 2009 and so they did not live through a proper recession. However, the companies sponsoring them (some of them that is) were in real estate before and that can give some guidance. I will post a separate message regarding risks.

* Illiquid investment. You have no control over timing of the sale. You better not need the money. (This is almost the same for a partnership interest in a multifamily property.) There is a secondary market, but it is very recent and untested.

* One has to be an accredited investor (1M assets without primary residence or 300k+ income.) However, note that this is not actually verified. At the same time, I totally agree with the accreditation requirement.

Finally, I thought first that the broker fees/commissions are crazy high for DST-s. These are around 8.75-9.5%! I always thought that 6% real estate commission is too high, especially true for the Bay Area. (Should be capped by a small multiple of the amount of real estate taxes, which is 1% in CA but 2.5-3% in Texas for example. That would take care of the problem!)

But then I realized that the 9% commission is only on the funds invested. When you buy a single family home with a loan, you pay commission on the loan amount you take on! Advice: do not pay full commission for getting DST-s. It is negotiable.