Potential Benefits of Passive Real Estate Management in DSTs

One of the reasons that investors often like to invest in real estate is because they like the idea of passive cash flow and passive real estate management. But what many investors quickly come to realize is that almost all real estate investing is not truly passive.

For example, investors in multifamily sometimes hire a property management company, only to quickly discover that even though they might not be managing the actual tenants, they usually end up having to manage the property managers!

And for those that invest in NNN properties believing that they won’t have any management responsibilities, they can rapidly realize that if the tenant files for bankruptcy or moves out, they’ll need to find a new tenant, negotiate a new lease, manage leasing agents, etc. or in the case of many NNN properties manage the tenants rent relief requests during a pandemic such as COVID 19…

And this isn’t to say that those investors cannot handle dealing with these issues, but why should they when there is an alternative that might be better in the form of a Delaware Statutory Trust (DST)?

There are generally 3 categories of how real estate investors manage their real estate:

1)    Investors that actively and personally manage their properties themselves

2)    Investors that hire a property-management company

3)    Investors that invest in DSTs

Investors that actively manage their properties:

For those that self-manage their investment properties, they might find yourselves fielding demanding calls and emails from tenants asking them to do things like unclog their toilets, change their burnt-out lightbulbs, fix the dishwasher, repair water leaks, get rid of alleged mold, etc…, and often these requests come in during the exact time that you’d rather not be dealing with those problems, like on the weekend, the middle of the night, on a holiday or when you’re on a vacation.

And that does not include finding tenants for your properties, interviewing them, running background checks, dealing with security deposits, doing walk-throughs, collecting rents on time, keeping up with city, county, and state rent laws and regulations, and more.

Then of course, sometimes dealing with tenants that have not paid their rent, or caused damage to your property, and then having to spend time, money and effort to evict them (if the city or state has not enacted an eviction moratorium as many have done during the COVID 19 pandemic). And then repeating the process again.

Investors that hire a property management company

Oftentimes, finding a property management company that can properly manage investors’ property is no easy task. Some examples include property management companies charging their clients for items that should be the responsibility of the tenant. They could also fail to effectively communicate with the  tenants, failing to pay enough attention to the client’s property because they are also managing many other properties and don’t have the requisite manpower to manage it all.

In addition, not negotiating prices and terms well enough on behalf of their owner clients when it comes to 3rd party providers such as plumbers and electricians, hiring employees that don’t adequately understand property management issues, and charging too much for their services making it financially unattractive for owners to employ them.

Investors that invest in Delaware Statutory Trusts (DSTs)

Delaware Statutory Trust investments are commonly managed by professional, institutional level, real estate companies and are often referred to as DST sponsor companies. These DST sponsor companies will often employ large, experienced, and credentialed on site property management companies. These companies oftentimes have decades of property management experience, operate in various states, and have the infrastructure necessary to potentially help manage properties efficiently and effectively.

Moreover, these property management companies have another layer of oversight by large and professional asset management companies, adding another level of accountability to DST investors and relieving investors of having to manage the property managers themselves.

Notably, because these property management companies usually manage thousands, if not tens of thousands, of units and properties, they are able to offer lower management costs while providing for a potentially higher level of professional service.

Any accredited investor (generally defined as having a net worth of over 1 million dollars excluding primary residence, or meeting certain income thresholds) that is considering investing in real estate in a passive, hands-free, way, without subjecting themselves to the numerous issues often associated with managing the property themselves, should consider investing in a DST. 

The nice thing about a DST is that, under the current IRS code, when the property is sold the investor is able to do another 1031 exchange if they so choose. This is one reason that investors are choosing DSTs over Real Estate Investment Trusts (REITs) as you are not able to utilize the 1031 exchange tax deferral solution when you sell REIT shares.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•         There is no guarantee that any strategy will be successful or achieve investment objectives;

•         Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•         Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•         Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•         Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•         Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•         Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits