Retirement Strategies for Real Estate Owners: Investing in DSTs vs. Net Leased Properties

As retirement nears, the emphasis on financial stability increases. Many real estate owners transition from actively managing properties to seeking passive investments that provide stability and consistent income. Delaware Statutory Trusts (DSTs) and net leased properties emerge as favored options for those aiming to broaden their investment mix and establish reliable sources of passive income in their golden years.

Both DSTs and net leased properties have unique advantages and disadvantages. Understanding their characteristics and associated risks is crucial for retirees to make informed investment decisions.

Understanding the Difference: Net Leased Investments vs. DSTs

Both net leased investments and DSTs can provide investors with passive, stable income and are 1031-qualified assets. However, they differ significantly in their investment structure.

Defining a Net Leased Investment

A net leased investment is characterized by the tenant's obligations to cover certain expenses as stipulated in the lease agreement with the owner which typically include property taxes, insurance, and maintenance. Net lease investments can vary from a single net lease to an absolute triple net lease (NNN).

In an absolute triple net lease, the tenant takes on the responsibility for payment of rent and all expenses linked to the property. Consequently in this scenario, the landlord's role is primarily to receive income from the property.

For retirement planning purposes, most net leased investments are single-tenant properties, such as standalone buildings with a single occupant. The financial strength and reliability of the tenant, which can vary across different investments, should be carefully considered.

Defining a DST

A Delaware Statutory Trust (DST) is distinct from a net leased investment in that it entails investment in a trust structure. Investors acquire an ownership stake in a pool of assets held within the trust, which is overseen by an investment sponsor. The assets within a DST can be diverse, ranging from multifamily to industrial assets or collections of net leased properties. Those who invest in a DST, referred to as beneficiaries, take on a passive investment role.

Pros and Cons: Comparing Net Leased Investments and DSTs for Retirement

Net leased properties and DSTs are favored options for retirement planning due to their passive nature. However, they differ significantly:

• Diversification: DSTs provide more diversification than direct net leased investments. An investor can diversify across multiple properties, asset classes, and regions with a DST, whereas direct net leased investments are typically limited to one or two properties.
• Liquidity: DST investments have less liquidity, with the sponsor deciding the sale timing, usually within five to seven years. In contrast, landlords of direct net leased properties control when to sell. Some DSTs offer liquidity by transitioning into a REIT via a 721 exchange.
• Ownership and Control: Investors have decision-making power in direct net leased investments, whereas in a DST, the sponsor manages the properties, making the investor's role truly passive.
• Estate Planning: DSTs simplify estate planning by allowing direct division of investments among beneficiaries, each receiving a stepped-up basis, unlike direct net leased properties where beneficiaries must collectively manage the real estate.

Choosing the Right Investment Option

If you're considering transitioning your real estate assets into passive investments, the team at Wealthstone Group is here to assist. With a deep understanding of the nuances of both net leased investments and DSTs, our advisors can provide objective recommendations tailored to your investment goals.

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General Disclosure

Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.

Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.

Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.

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.