Are you considering investing in a DST but having a hard time giving up control?
In this two-part series I will attempt to navigate the very real feelings associated with passive investing. I will explain why it’s something to consider, how it benefits your heirs, and discuss some of the psychological roadblocks many people encounter.
As promised in part one of our article here are some considerations and thoughts I’ve put together as you decide if and when to transition from an active investment to a more passive one like a Delaware Statutory Trust (DST.)
The Great Wealth Transfer
How does passive investing benefit your heirs?
- It preserves the step up in basis – a “swap ‘till you drop” scenario deferring taxes for the life of the perpetual exchange.
- It simplifies estate planning – if there are multiple children each may have different needs.
- It enables liquidity options at a lower tax rate.
What about diversification?
- Passively investing in an UPREIT or DST can potentially provide for greater real estate diversification versus solely being invested in a single property in one market. With passive investing, you have the opportunity to consider a multitude of diverse investment property types in various markets with potentially more favorable landlord/tenant laws, demographics, job growth, etc.
- Instead of one single asset, you’re working with institutional quality investment grade assets, professional institutional management, insurance, etc.
Who is doing all the work?
When investing in a passive real estate program such as a DST you are, indeed, buying a property, but what you’re really investing in is the sponsor, their track record, balance sheet, etc. along with the business plan. They will be making the big decisions and they handle the day-to-day responsibilities and crises.
How do I know they know what they’re doing?
- Due diligence
- There are many sponsor options available that have gone through extensive due diligence by institutional managers, and third-party due diligence experts and are much more comprehensive than what you or I could do.
- References
- Get references from your peers and colleagues on their experience with the sponsor and their registered representatives.
How do I know my ‘real’ financial return? We can help you figure out the numbers.
- Think about how much your time is worth. Have you determined your return on investment and how much you’re earning after expenses?
- Are you just looking at the rent check you receive and counting it as your income/earnings?
- Are you calculating your return on investment on your original basis – not the current value/equity position?
- Have you budgeted for future capital expenditures (roof, plumbing, new flooring, kitchen, baths, etc.) to maintain the property and its value to keep up with current rental rates?
- Have you performed a cash flow analysis to figure out what you are actually earning?
- How much are you paying yourself for your time? How much per hour, how many hours per week/month?
Getting down to the deep feelings. We can help ease your fears with examples of investors like you.
- Do you have a fear of the unknown? Many investors aren’t sure they want to change the investment course they’re presently on and are hesitant to throw the reins to someone else.
- Are you feeling comfortable, empowered, and prideful having managed your rental property for many years, being hands on, and can’t imagine giving up control?
- Are you struggling to embrace a new lifestyle decision – going from active to passive?
Things that can impede your progress in making a decision or change.
- Not having a plan
- Waiting too long to plan
- Not considering tax implications
- Not seeking professional advice
Diversified Investment Strategies represents a team of experienced and trusted professionals specializing in real estate investment and services – including buying, selling, leasing, retirement planning, and wealth growth and management through strategic, informed investment choices and a meticulous real estate investment analysis. As knowledgeable replacement property professionals, they help clients build a customized strategy that identifies suitable investments pursuing successful completion of a 1031 Tax-Deferred Exchange. Contact us or call 949-379-2080.
*Example portfolio is hypothetical and for illustrative purposes only. Individual results will vary and are not guaranteed.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor. This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstances. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. There are material risks associated with investing in private placements, Delaware Statutory Trusts (“DSTs”) and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potentially adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS. FOR ACCREDITED INVESTOR USE ONLY.