Real estate stands out as a distinctive and promising asset class, offering a shield against inflation, a revenue source, tax advantages, profit potential, and portfolio diversification. Investing in real estate can take various forms, tailored to each investor's unique priorities, timeframes, risk appetites, and financial goal. Each investment method has its own costs and benefits and it is important to consider the costs and benefits of each. Consulting a qualified advisor before investing could ensure you align your strategy with your goals. 

While most investment choices into real estate share similar qualities, direct ownership stands out as the most tax-efficient method, surpassing alternatives like REITs, Interval Funds, or partnerships. Through direct ownership, investors not only reap the benefits mentioned earlier but also benefit from real estate's tax advantages, such as depreciation serving as a non-cash tax deduction against net operating income. Additionally, they can utilize like-kind exchanges (1031 Exchange) to defer taxes when transitioning into or out of properties. According to Tracey B. Nguyen, JD, MBA, a Principal at Baker Tilly, “1031 exchanges empower investors to defer taxes, diversify portfolios, and amplify buying power, transforming real estate transactions into strategic wealth-building opportunities."

For instance, if someone were to purchase their own investment property and handle it independently, they might soon find themselves battling the "5 Terrible T’s of Active Property Investing," as described by Gary Callahan, Managing Director of Inland Private Capital:

1. Toilets (and other plumbing)
2. Termites (and other infestations)
3. Trash
4. Taxes (appeals)
5. Tenants

However, if someone were to invest in a Delaware Statutory Trusts (DSTs), it provides the same tax related ownership qualities without the time or aggravation of the “5 Terrible T’s”. There are also additional advantages such as no capital calls; indemnification of all liability; and institutional quality property exposure. 

Similar to actively managed real estate investments, investors can utilize a 1031 exchange to transition proceeds from other investment properties into and out of DSTs.Unlike actively managed properties, DSTs require no additional cash infusions for appliance replacements or renovations, offering investors insulation from legal responsibilities. Also, with a DST you are co-investing with private equity issuers for a far larger and deeply evaluated property than an individual can accomplish on their own. In short, you have the same tax advantages (if not additional tax benefits) as owning a property you would actively manage except no responsibility, limited liability, no capital calls, institutional level property and are deeply vetted by regulatory agencies and due diligence firms. 

Considering their attributes, Delaware Statutory Trusts (DSTs) could serve as ideal retirement investment vehicles for real estate professionals transitioning away from being landlords.  “Delaware Statutory Trusts allow investors to retire from real estate while still maintaining all the benefits of owning real estate,” explains Adriana Olsen, Senior Vice President of Passco Capital, Inc. “A 1031 exchange is one of the last estate planning IRS codes still available to help our investors leave their legacy to their heirs. Because we have the ability to pool together investors’ funds and purchase large, institutional quality real estate, DSTs give our investors a chance to purchase a property that they likely could otherwise never buy.”  

However, DSTs can also serve two additional purposes. First, it provides a means for passive investors to diversify their portfolios with high-quality real estate, while retaining the tax advantages of direct ownership. Olsen continued, “The low minimum investment amount for DSTs allows investors to take that one large egg out of that one basket and create a portfolio of mini eggs in multiple baskets.”  Secondly, wealthy families may recognize the value of incorporating real estate assets and tax benefits into their overall wealth strategy but prefer not to be responsible for day-to-day management. Additionally, active real estate professionals may be engaging in a 1031 exchange into a new self-managed property but have unallocated funds remaining (considered as "boot" - taxable proceeds from the sale of an investment property) unless they acquire another real estate asset. With most DSTs requiring a minimum investment of $100,000, a modest allocation to this vehicle alongside the targeted replacement property can help avoid triggering the recognition of "boot".

Real estate investors aiming for growth may discover added benefits in DSTs as a substitute for direct ownership of a single property, given the diversification prospects they offer. Imagine an intention to allocate $500,000 to real estate. Further, assume lending terms require a 25% down payment on investment property. If pursuing actively managed property, $500,000 would yield you just one property. However, with a DST portfolio, you could allocate that same amount to 5 or more different properties (depending on minimums - non-1031 transactions often have an even lower $25,000 minimum investment requirement) because of the lower minimum investment. 

When contemplating the suitability of using a DST for your specific situation, it's crucial to weigh the numerous drawbacks. Among the risks linked to DSTs are the following:

1. Illiquidity: These investments lack liquidity, typically lasting around 5.5 years but potentially extending to 10 years or more. While there could be a secondary market for these assets, it operates in an unregulated space without endorsement or backing from private equity firms, resulting in a fragmented landscape.
2. Cash Out Limitations: In contrast to other real estate investment options, these structures do not offer a cash-out refinancing avenue. Although some third-party lenders might consider loans against DST interests, such opportunities are heavily reliant on personal connections with the investor.
3. Lack of control: The investor does not have any decision making authority over the DST asset which may be a positive for some but a negative attribute for others. 
4. Limited Diversification: Each DST solely focuses on a single property, leading to an undiversified investment that is entirely exposed to the specific business risks associated with that location.
5. Industry-Specific Risks: Furthermore, standard industry risks impact DSTs as they do the broader real estate sector, including economic downturns and unfavorable demographic trends.

In conclusion, Delaware Statutory Trusts (DSTs) offer a compelling alternative for those looking to invest in real estate but wish to avoid the hands-on management and challenges associated with traditional property ownership. By providing significant tax advantages, potential for portfolio diversification, and reduced direct management responsibilities, DSTs can be an attractive option for retirement planning, passive income generation, and tax-efficient investing. However, it's essential to carefully consider the associated risks, such as illiquidity, limited diversification, and lack of control, which may not align with all investment strategies. 

If you're contemplating incorporating DSTs into your real estate investment portfolio, it's crucial to seek professional advice tailored to your unique financial situation. For those interested in exploring DSTs further or looking for guidance in navigating the complexities of real estate investments, please feel free to reach out to David Gottlieb. By understanding both the opportunities and challenges of DSTs, investors can make informed decisions that align with their long-term investment goals and financial objectives.

Savvy Wealth, Inc. is a tech company and the parent company of Savvy Advisors, Inc (“Savvy Advisors”).  All advisory services are offered through Savvy Advisors, an investment advisor registered with the Securities and Exchange Commission (“SEC”).  David Gottlieb is an investment adviser representative with Savvy Advisors. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.  Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.

Securities offered through DAI Securities, LLC, member FINRA/SIPC. Advisory services offered through Savvy Advisors, Inc an SEC registered investment adviser. DAI Securities, LLC and Savvy Advisors, Inc are separate, and unaffiliated, entities.

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