Investing in a Delaware Statutory Trust (DST) can provide real estate investors with potential income and equity growth opportunities without the burden of day-to-day management responsibilities. However, like any investment, DSTs come with risks that can significantly impact your financial portfolio. Understanding these risks—whether related to market factors, sponsor reliability, or illiquidity — is essential for making an informed investment decision.
Understanding the risks
Before diving into the world of DSTs, it’s crucial to familiarize yourself with the potential risks that may arise. Let’s explore the top seven key risks associated with DSTs.
One of the primary concerns with DSTs is its illiquidity. Investors looking to exit a DST before the trust’s dissolution may find it challenging to sell their interest in the secondary market. This lack of liquidity can be particularly problematic for investors who need to access their capital for unforeseen reasons.
Real estate investments are subject to market risks, and DSTs are no exception. Your investment may experience the cyclical ups and downs of the broader real estate market. It is prudent to carefully conduct due diligence in the markets where the property is located and the economics that support that investment. Selecting an investment in trending markets will more than likely lead to positive results vs markets that are trending flat or out of favor.
A DST’s sponsor is responsible for acquiring, managing, and selling the investment properties within the DST. Evaluating a sponsor’s track record and financial stability is vital to an investor’s due diligence process. A sponsor’s history can offer insights into their ability to navigate challenges and successfully manage the DST.
In the event of unexpected large-ticket expenses, DSTs face a significant limitation: there’s no way to raise new capital to cover the costs. This inability to generate additional funds can create financial strain on the DST and its investors.
The success of any real estate investment largely depends heavily on the quality of the sponsor’s underwriting and its ability to add value to a property. In addition, factors such as the physical condition of the property, its location, and the local market conditions are significant risks that must be carefully evaluated. Diligent attention to these details can either enhance your returns or save you from unexpected property issues.
Investing in a DST means relinquishing direct control over investment decisions. When investors contribute their exchange proceeds to a DST, they are entrusting the sponsor to select, manage, and eventually sell the property. While this can relieve investors from management burdens, it also places significant trust in the sponsor’s expertise, ability and fiduciary responsibility to execute.
Unexpected expenses can lead sponsors to reduce or eliminate distributions to investors. This unpredictability in cash flow is a crucial risk to consider, especially for those relying on the income generated from their DST investments.
While 1031 DSTs offer a pathway for real estate investors to defer capital gains taxes and diversify their investment portfolios, the complexities and risks involved require careful consideration. Investors should conduct comprehensive due diligence, consult with financial and tax advisors, and thoughtfully evaluate their long-term investment goals and risk tolerance before proceeding.
At Wealthstone Group, we specialize in guiding investors through the complexities of DST investments. Our experienced advisors can help you assess the risks, navigate the market, and make informed decisions that align with your financial goals. Contact us today to schedule a consultation and learn how we can help you achieve success in your real estate investment journey.
General Disclosure
This material is provided for informational and educational purposes only and is based on information from sources we believe to be reliable. However, its accuracy is not guaranteed, and it is not intended to be the sole basis for investment decisions or to meet specific investment needs.
Wealthstone Group does not offer tax or legal advice. This content should not replace professional advice tailored to your individual situation.
Not an offer to buy, nor a solicitation to sell securities. 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. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.