--- title: Are DSTs a Good Investment? Understanding the Advantages and Risks description: Explore the advantages and risks of investing in Delaware Statutory Trusts for 1031 exchanges, and determine if they align with your financial goals. image: https://blog.wealthstonegroup.com/hubfs/Wealthstone-FI-.jpg --- - Client Portal [![Gold-Logo-1](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Gold-Logo-1")](https://www.wealthstonegroup.com/) [![Wealthstone-logo-gold](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Wealthstone-logo-gold")](https://blog.wealthstonegroup.com/) - [About](https://www.wealthstonegroup.com/about) - [Real Estate](https://www.wealthstonegroup.com/real-estate) - [1031 Exchanges](https://www.wealthstonegroup.com/real-estate/1031-exchanges) - [1033 Exchanges](https://www.wealthstonegroup.com/real-estate/1033-exchanges) - [721 Exchanges](https://www.wealthstonegroup.com/real-estate/721-exchanges) - 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Understanding the Advantages and Risks by [**Paulo Aguilar, CFA, CAIA**](https://blog.wealthstonegroup.com/insights/author/paulo-aguilar) on Sep 28, 2026 For real estate owners considering a 1031 exchange, [Delaware Statutory Trusts](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts) can offer an attractive combination of tax deferral, passive ownership, institutional real estate, and portfolio diversification. But those benefits come with important trade-offs, particularly around liquidity, control, fees, and reliance on the DST sponsor. Whether a DST is a good investment therefore depends on what the investor is trying to accomplish. For someone who wants to remain actively involved in managing real estate and retain control over major property decisions, a DST may be a poor fit. For an investor looking to transition away from active ownership while maintaining real estate exposure and 1031 exchange tax deferral, it can be a valuable planning tool. > A DST is not inherently a good or bad investment. Its value depends on whether the structure, underlying real estate, sponsor, and expected holding period align with what the investor is trying to accomplish. Understanding both sides of that equation is important before evaluating any individual DST offering. ## Why Investors Consider DSTs One of the primary reasons investors consider DSTs is simplicity. Many real estate owners have spent decades managing apartment buildings, commercial properties, or other investment real estate. As they approach retirement or simply become less interested in the day-to-day responsibilities of ownership, they may want to preserve their real estate exposure without continuing to operate the properties themselves. A DST can accomplish that transition. The investor owns a fractional beneficial interest in a trust that owns institutional real estate, while the sponsor handles property management, leasing, financing, reporting, and ultimately the disposition of the property. Investors generally receive periodic distributions without being responsible for tenant calls, maintenance, lease negotiations, or property management. For 1031 exchange investors, DSTs can also qualify as like-kind replacement property when properly structured. This allows an investor to sell directly owned investment real estate and exchange into one or several DSTs while continuing to defer capital gains taxes and depreciation recapture. The fractional structure creates another potential benefit: diversification. Instead of reinvesting several million dollars into one replacement property, an investor may be able to divide the exchange among multiple DSTs representing different property types, geographic markets, lease structures, and sponsors. That can materially change the investor's risk profile. A portfolio previously dependent on one building, one market, and perhaps one tenant can potentially be spread across several underlying real estate investments. ## What Investors Give Up in Exchange The same structure that makes DST ownership passive also requires investors to relinquish control. A direct property owner can decide when to refinance, whether to renovate, which tenants to accept, how aggressively to negotiate leases, and when to sell. A DST investor generally does not make those decisions. The sponsor manages the property according to the trust documents and the investment strategy established when the offering was created. For some investors, giving up those responsibilities is precisely the objective. For others, particularly experienced real estate operators accustomed to controlling their assets, it can be one of the most difficult adjustments. Liquidity is another important limitation. DSTs are private, illiquid real estate investments. There is generally no established public market where an investor can readily sell a beneficial interest, and investors should not assume they will be able to access their principal before the investment reaches its planned exit. Anticipated holding periods vary by offering and are not guarantees. Depending on the structure, market conditions, and sponsor strategy, an investor could remain in the DST for a number of years before a sale or other full-cycle event occurs. That makes liquidity planning particularly important. Capital that may be needed for near-term spending, healthcare, family needs, or other financial objectives generally should not be committed to an illiquid investment without considering other available resources. ## The DSTStructure Itself Creates Constraints There is another limitation that is less obvious to many investors. DSTs operate within specific tax and legal restrictions that help preserve their qualification for 1031 exchange purposes. These restrictions can limit what the trustee is permitted to do after the offering has closed. For example, the DST structure generally restricts the ability to raise additional capital, renegotiate certain financing arrangements, or materially change the nature of the investment. These rules are sometimes referred to within the industry as the DST's "Seven Deadly Sins." The terminology sounds dramatic, but the underlying point is straightforward: a DST does not have the same operational flexibility that an individual owner or conventional real estate partnership may have. That matters most when circumstances change. A well-capitalized property with predictable leases may require relatively little intervention. A property facing significant tenant rollover, unexpected capital needs, or changing market conditions may require greater flexibility. Investors should therefore evaluate not only how a property is performing today, but how resilient the structure may be if the original assumptions change. ## Sponsor Selection Matters as Much as Property Selection A DST investment is ultimately a combination of two decisions: choosing the real estate and choosing the organization responsible for managing it. The sponsor acquires the property, structures the offering, establishes the financing, manages the asset, communicates with investors, and ultimately determines when and how the property is sold within the authority provided by the offering documents. The quality of that organization can have a significant influence on the investor experience and outcome. Due diligence should therefore extend beyond the property's projected distribution rate or location. Investors should examine the sponsor's experience with the specific asset class, capitalization, historical performance, prior full-cycle investments, use of leverage, fee structure, and experience navigating periods when investments did not perform according to the original underwriting. Full-cycle history can be particularly informative. Acquiring a property and raising capital tells only part of the story. Investors should also understand how a sponsor has managed properties through changing economic conditions and ultimately exited prior investments. Diversification can apply here as well. An investor who owns several DSTs from the same sponsor may have diversified across properties but remains concentrated in one management organization. For sufficiently large exchanges, spreading capital across sponsors can reduce that additional layer of concentration. ## Fees Should Be Evaluated Alongside the Investment DSTs also have costs that investors should understand before investing. Depending on the offering and how it is accessed, these may include sponsor acquisition and financing-related fees, asset management fees, disposition fees, selling commissions, dealer-manager compensation, and other offering expenses. Those costs do not automatically make an investment unattractive. Commercial real estate ownership has costs regardless of whether it is owned directly or through a syndicated structure. The relevant question is whether the expected investment economics justify the total cost. Investors should review the Private Placement Memorandum (PPM) and understand how much of their capital is being deployed into the underlying real estate, what fees are paid during the holding period, and what expenses may apply when the property is eventually sold. The analysis should ultimately focus on expected net returns rather than simply the stated distribution rate. A DST offering a higher current distribution is not necessarily the better investment if that income comes with greater leverage, weaker tenants, higher fees, more aggressive assumptions, or greater risk to principal. ## Not Every DSTHas the Same Exit Strategy Investors should also understand what is expected to happen at the end of the investment. A traditional DST generally anticipates an eventual property sale. When that occurs, investors receive their proportionate share of the proceeds and can decide whether to pay the resulting taxes or pursue another 1031 exchange. Other DSTs are structured as part of a planned 721 UPREIT strategy. In those cases, the anticipated path may be for the underlying property to eventually be contributed to a REIT operating partnership in exchange for operating partnership units. Those are meaningfully different strategies. The potential liquidity, diversification, tax considerations, fee structures, and future investment options can differ considerably. The exit strategy should therefore be understood before the investment is made, rather than treated as something to address several years later. > The most important DST due diligence question is not simply, ‘What does this investment pay?’ It is, ‘What am I investing in, what risks am I accepting, who is responsible for managing them, and what is the expected path from investment through exit?’ ## Who May Be a Good Fit for a DST? DSTs tend to be most relevant for real estate owners who want to continue deferring taxes through a 1031 exchange but no longer want all of the responsibilities associated with direct ownership. They can also be useful for investors who want to diversify a concentrated real estate position or who have a compressed exchange timeline that makes acquiring another direct property difficult. They may be less appropriate for investors who require near-term liquidity, want substantial control over property decisions, are uncomfortable delegating management to a sponsor, or prefer the flexibility to sell or refinance whenever they choose. The decision also does not have to be all or nothing. Depending on the investor's circumstances, a 1031 exchange can potentially combine direct real estate, DSTs, and other qualifying replacement properties. The objective should be to construct a replacement strategy around the investor's needs rather than forcing the entire exchange into a single structure. ## Conclusion DSTs can solve several meaningful problems for 1031 exchange investors. They can provide passive real estate ownership, access to institutional properties, diversification, simplified execution, and continued tax deferral without requiring the investor to remain an active landlord. Those advantages come with equally important limitations. DST investors give up control, accept illiquidity, depend heavily on the sponsor, incur offering and management costs, and invest within a structure that has less operational flexibility than direct real estate ownership. Neither side of that equation should be evaluated in isolation. The better question is not simply whether DSTs are good investments. It is whether a particular DST, sponsor, property, structure, and exit strategy fit the investor's financial objectives, liquidity needs, risk tolerance, and broader real estate plan. A structured planning discussion can compare those considerations against direct replacement property and other 1031 exchange alternatives before an investor commits capital. *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. 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