1031 exchange to DST, anybody?

[BeachOrCity]

You're welcome!

There are folks on this board who will tell you it can't be done, or the fees will eat your lunch, or my favorite, only the bad deals are advertised. But my passive RE portfolio (half DST and half LLC) pays me more than I made when an active owner, pays 85% of my monthly expenses and enabled my early retirement. I'm wishing you great success!

What year did you buy you’re dst’s and what has been your CoC?

Most of what I saw when I looked at them in 2017 was 5-6 percent CoC.

 

[markelp]

I find this thread very valuable. Thank you to those who have contributed. I have a relatively large gain on a rental property and looking into options. BeachOrCity and Bruceski44, any updates on your DST investments?

 

[BeachOrCity]

I never found a dst I liked. I have only done 1031 and opportunity zones

 

[Bongleur]

Is DST income ordinary income?

I wonder if a husband & wife who own a property can arrange to own it 50% each. Then one year, a spouse sells their half to the other - paying depreciation recapture on that half. Then the next year, the other spouse who now owns it all, sells -- paying trivial 1 year depreciation on half, and the full amount on the other half.

This would divide the tax hit into two tax years.

 

[Bongleur]

Is there any benefit to putting "new money" into a DST? 5% sounds really good nowadays. The risk adjusted return might be hard to determine.

Being locked in for an indeterminate time,
paying depreciation tax when you do get out (so you cannot use it for your own medical expenses when they occur, and getting less)
skill and honesty of the managers...

 

[BeachOrCity]

Is there any benefit to putting "new money" into a DST? 5% sounds really good nowadays. The risk adjusted return might be hard to determine.



Being locked in for an indeterminate time,

paying depreciation tax when you do get out (so you cannot use it for your own medical expenses when they occur, and getting less)

skill and honesty of the managers...

5% cash on cash is indeed what some stabilized real estate pays now a days.
But you won’t find an experienced real estate investor who says that is “good”.

You always need to think about where the money will come in 10 years for major rehab? What buyer will want this property if they need to take a loan out at 6% instead of the 4% more hour dst had.

With 5% there is a LOT of risk imho

 

[Bruceski44]

An update on my DSTs:

All three are maintaining cash distributions to date.

I just got a report from my multi-family DST which said they collected 97% of rents in April and expect to exceed that this month. They do have payment plans for about 10% of tenants and they are all current.

Although valuations are not current, considering the cash flow hasn't diminished, the cap rate should be unchanged and therefore the value is also unchanged.

Compare that to my REITs (about 3% of my portfolio):

2 out of 3 of them have suspended dividends (although they will have to make this up to meet the 90% profit distribution rule for a REIT, unless the rules change)

Their value is down about 50% YTD.

My conclusions:

The liquidity provided by REITs can work against them during periods of irrational panic.

DSTs rely on capital reserves and good management to maintain distributions.

DSTs with reasonable LTV are not subject to margin calls like REITs.

DSTs (if well-chosen) are an excellent means to preserve capital and provide regular, reliable income.


ETA: I realize it's still early in the worst-case scenario, but if the economy is allowed to resume, we will not see the worst-case. The DST properties are not in deep-blue states, so I don't expect much government interference.

 

[lordjust]

We (my wife and I through a trust) have owned several DST properties for about 4 years now. We got tired of managing our rental and are actually earning more money through the DST than we did with our rental.

A DST is similar to a TIC (tenant-in-common) which provides an easy method to buy a portion of a property, or the entire property. The TIC is handicapped by the fact that ALL the members must agree on any change in plan, which is nearly impossible to achieve in practice. The DST is restricted by law and the PPM as to what it can actually change or how it operates.

We ended up owning parts of 4 different DSTs, all bought through Kay Properties and Investments (KPI). We paid no fees to them and were pleased with their support. The DSTs are conservative in operation, with large reserves and relatively low monthly distributions. We are getting 5% - 7% annual distributions paid monthly and expect IRRs of 10-14% at sale. The exit strategy is usually a sale within 7-10 years whereupon another 1031-exchange will put us in another property, hopefully with a larger stake. Eventually, they will pass to our heirs with a stepped-up basis. Capital preservation is critical. We also own some shares of properties in LLCs, but since I retired, I find the steady cash flow of the DST is much preferred to the lumpiness of the LLCs distributions. Many of the DST sponsors are excellent managers.

I understand that a few DSTs made capital calls in the great recession, which means the investors were forced to come up with more money to offset loss of operating income and to preserve the investment. This risk should be thoroughly understood for the property you are considering. IIRC, Passco was the only sponsor which made no capital calls during that time, but you should check my memory with your broker (KPI).

Some of the bigger DST sponsors are Capital Square Realty Associates (CSRA), ExchangeRight, Inland, Passco.

Here's a summary of our investments and how they've fared so far:
1. Made a cash purchase in a CVS on the Vegas strip through CSRA. This property has been vacated by CVS, but they must continue to maintain the property and pay rent through the lease end in 2029. They are trying to sublet it. There is some small risk that the lender will hold all the income in reserve, but this has not happened so far. We continue getting monthly payments from them. CVS, being investment grade, guarantees the lease and is not at risk of bankruptcy, so the property should continue to provide income.

We broke the proceeds from our rental sale into 3 different DSTs via 1031:
1. ExchangeRight5 - an assortment of 12-14 retail properties in many locations throughout the midwest and south. They are all neccessity retail, which means auto parts, drug stores, grocery stores, etc. There were some reports of hurricane damage to one or two properties last fall, but there was no interruption to cash flow.
2. ExchangeRight6 - similar to ER5 above. I really like the geographical diversity and mix of tenants provided by these large DSTs.
3. A multifamily property run by Bluerock in NC. This property is being sold (early in the cycle IMO) and we're looking to flip via 1031. We got about 7% IRR which was mostly the monthly distribution of 5.75%. I may have made a poor choice on location with this one because I was stretching for yield. Lesson learned.

After almost 4 years of mailbox money with no concerns and regular status reports, we're now getting back into the details to make the best choice for the proceeds from the multifamily property. We are considering if we want to stay in the multifamily sector or pick another sector which may experience more growth in a growing economy. Industrial, office, self-storage, medical, retail are some examples.

I realize all of these are at risk if we go through another great recession, but hopefully have picked my spots carefully enough to avoid getting roasted. The risks are all identified in the PPM (private-party memorandum) which you should get from KPI.

You may hear on this forum that that there are no good investments mass-marketed to individuals and you must be an insider to profit. The landscape really changed in 2012, with the passage of the JOBS Act, which now allows sponsors and operators to publicly advertise these investments. Prior to that there had to be a personal relationship between sponsor and investor, which really cut down on activity and rewarded insiders. I've never really been an insider and have benefited from the new openness. I hope you do too.

Another benefit of the JOBS Act was to open many of these investments up to non-accredited investors. Previously, they were restricted to accredited investors who met net worth or income requirements. Now, it's far more open, although there are limits on how much you can invest.

Thanks Bruce... very helpful post.

 

[Rickt]

Thank you Bruce for sharing an update. Glad DST's are maintaining their distributions. Please continue sharing your experience from time to time as it will help the rest of us.
Best wishes,
Rick