Fortitude's Insights

How Realtors Can Expand Existing Business Through 1031 Exchanges and DST Replacement Properties

Posted by Roy Pfleger on Feb 7, 2019 11:30:00 AM

As a real estate professional, knowledge about the DST (Delaware Statutory Trust) can not only help you generate listings, but can also help you stand out among your clients -- especially baby boomers who are entering retirement and looking to explore their real estate options. 

By understanding and communicating the potential benefits of a DST investment in a 1031 Exchange, you can minimize any concern's your client has and help guide them in the right direction. 

Here are 8 approaches on how to utilize a DST investment with your clients.

1. Identification Issues

Realtors are finding it challenging in today’s market to find their real estate investor's replacement properties, leading to apprehension in obtaining listings. Thinking about finding the deal, getting it under contract, inspections, financing, title, etc., all add to seller’s anxiety and reluctance to pull the trigger and list. A DST investment can eliminate/minimize these issues as either the primary property or as a back stop. The “3-property” rule is the most common way to identify properties within the 45-day period.  It is easy to work with your DST advisor to provide a back up if you have the room to identify them. Leaving a blank on the ID form is not best practices and adding a DST allows it to act as an “emergency parachute” by providing your client the safety of a fall back option.

  • Property 1 – Realtor’s choice
  • Property 2 – DST provided by Financial Advisor
  • Property 3 - DST provided by Financial Advisor

 

2. Institutional Quality Replacement Properties

Your investor may have properties that have issues such as lower quality, deferred maintenance, poor management, fully depreciated and/or lower returns on today’s equity. The majority of DST investments are larger, institutional grade properties with long terms leases and higher occupancy rates. The size, value and quality of these assets also garnish lower loan interest rates for major banks, lenders and agencies. In today’s market we are seeing returns on equity invested in the 5% range

 

3. Easy Replacement Solution

We know that some of your clients are never inclined to sell their building because they don’t have or fear finding a replacement property. They are concerned with of the hefty tax bill that comes along with selling their property. Working with a company like Fortitude can assist you by presenting a DST or a portfolio of DST’s that the client may be comfortable investing in, so you as an exchange specialist can get the listing.

 

4. Additional Equity or Debt Left Over

Many times, a realtor will sell a client’s property but only find a replacement for SOME of their proceeds. Example: Property sells at $2M and the new property is only $1.8M. This would require your seller to pay taxes (boot) on $200,000. Typical DST minimums are $100,000. This could result in your investor picking up another one or two properties, having no tax issues and diversifying their real estate portfolio. Your client may also need additional debt that their 1st choice does not completely cover.

  • Property 1 – $1.8M Realtor’s choice
  • Property 2 – $100,000 DST
  • Property 3 - $100,000 DST

 

5. Replacement Debt Issues

Realtors find one of the major components of executing a 1031 exchange is making sure that all the debt from the client's relinquished property is replaced. Debt can be replaced by adding more equity, but usually not ideal for the seller. Lenders can be fickle with their underwritten, loan to value (LTV), personal guarantees, appraisals and so on. Using a DST, the debt is non-recourse to the investor so there is no individual underwriting. The investor gets the benefits of the debt but not the personal liability due to the trust structure. DST investments can be structured to accommodate most debt requirements.

 

6. Passive Management - Retiring from the 3 T’s (Toilets, Tenants & Trash)

Is your client looking to get out of management responsibilities? The DST Sponsor’s provide institutional quality professional management services. This truly allows your client to retire from the toilets, tenants and trash aspects of owning and managing real estate.

 

7. Ability to Diversify With Low Minimums

Diversification is almost always an important aspect to any client’s investment strategy.  A DST investment typically has a $100,000 minimum investment for “Accredited Investors” in a 1031 exchange. These low minimums can assist your client in putting together a truly diversified real estate portfolio that spans several states and real estate sectors. Very helpful when your client doesn’t want to put “all their eggs in one basket”.

 

8. Legacy Planning Simplified

The morbid saying for a 1031 exchange is “swap-until-you-drop”. Your seller keeps 1031 exchanging their properties until they pass.  At that point their heirs receive the properties at a step-up tax basis. The DST keeps this strategy simple. Due to its passive nature the heirs have no management responsibilities. Instead of worrying if one property will be better than the last, the DST can allow many arms of one family to receive an interest the same investment.

If you want to know  if a DST is right for your client or want to learn more about this topic,  please feel free to contact us

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Written by Roy Pfleger

Roy brings his extensive operational background and insurance expertise to Fortitude Investment Group. Roy serves retail clients, small business owners and high-net-worth investors, developing solutions to help them achieve their financial goals through wealth management, retirement planning, advanced insurance solutions and alternative investments.

Have a commercial real estate investment question?

Give us a call to discuss your investment options at 844-4DST1031 (844 437-8103)

Topics: Delaware Statutory Trust, 1031 Exchange

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence or $200,000 income individually/$300,000 jointly of the last three years) 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. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM and CIA.

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With over 100+ years of combined experience facilitating 1031 exchanges, including the largest 1031 exchange utilizing DST’s in our industry, we are your trusted partners in helping you achieve success.  We believe that education and service matter, and we are committed to providing our clients with the resources required to facilitate the entire exchange process.

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