You don’t need to be reminded of the pain that inflation can inflict on your spending power and investment portfolio performance. For over two years now, we have lived through some of the highest inflation in US history, and while the Fed remains steadfast in its mission to tame inflation, it does not appear that this erosive demon is going away anytime soon.

Today, inflation remains a perennial concern for investors. At Fortitude Investment Group, we understand the importance of safeguarding your investment income and returns during times like these. One highly effective strategy that can help you counter the impact of inflation is an often overlooked commercial real estate investment called the Delaware Statutory Trust (DST).

In this article, we look at why DSTs can be effective investment vehicles during periods of inflation and how they can act as a powerful defense mechanism to protect your purchasing power and financial well-being. But first, it may help to know that commercial real estate, as an asset class, has historically proven to be an effective inflation hedge. 

According to the National Council of Real Estate Investment Fiduciaries (NCREIF),

"Commercial real estate investments have historically demonstrated strong resilience against inflation, often outperforming other asset classes."

And the Urban Land Institute supports this view with its research. 

"Real assets, particularly commercial real estate, have the ability to maintain their value and often increase it during times of inflation."

The Power of the Delaware Statutory Trust

DSTs are a unique investment structure that allows investors to pool their resources and acquire fractional ownership of high-quality, income-generating commercial real estate properties. These properties can include apartment buildings, office spaces, retail centers, and more. 

DSTs have gained significant popularity for several reasons, and their efficacy during times of inflation is undeniably one of them. In fact, recognizing the resilience of commercial real estate to withstand the effects of high inflation, The DST structure may provide for an additional layer of inflation protection.

DST Inflation Protection Characteristics

DSTs can offer protection in rising-price environments in a few ways.

Real Asset Ownership: DST’s can provide investors with a tangible, real asset investment. Unlike traditional stocks and bonds, commercial real estate has historically appreciated in value over time. During periods of inflation, hard assets like real estate have generally held their value, acting as a hedge against the declining purchasing power of currency.

Income Stability: One of the most attractive aspects of DST’s is their potential to provide for a reasonably consistent income stream. These investments can generate rental income from their properties, which can then be distributed to investors on a recurring, regular basis. This income can also help counter some effects of inflation, as rates of return can increase along with rental rates.

Diversification: By investing in DST’s, you can add a non-correlated asset class to diversify your investment portfolio. Diversification is a key strategy for mitigating risk during turbulent economic times, and it can also help serve as another form of inflationary hedge through providing the opportunity for investment returns not tied to traditional equity or fixed income investments.

Lease Structure: DSTs can own virtually any type of commercial real estate, including assets like multifamily housing and student housing, which are properties where managers have traditionally reset rents every six to nine months. This allows managers to boost rents more frequently than other property types and navigate inflationary times in a nimbler manner.

Tax Advantages of 1031 Exchange DSTs

Tax-Efficiency: DSTs are considered like-kind property for investors who sell an investment property and replace that property by using a 1031 Exchange. When investors exchange one property for another under Section 1031 of the Internal Revenue Code, they can defer capital gains taxes. This allows investors to keep all their sale proceeds at work, enabling them to utilize the power of compounding.

How to Get Started with DSTs

As an investor interested in the potential advantages of DSTs as an inflation hedge, it's essential to work with professionals who understand the intricacies of this investment vehicle. Fortitude Investment Group is a recognized leader in DST investments, and we have an extensive track record of helping clients use the DST strategy successfully.

Our 1031 Exchange Guide is a comprehensive resource that will help you learn more about the advantages of investing in commercial real estate through DSTs. With our guidance, you can build a diversified portfolio that shields your wealth against inflation, provides tax benefits, and offers consistent income.

Important Disclosures

Please consult the appropriate professional regarding your individual circumstances. Because investor situations and objectives vary this information is not intended to indicate suitability for any individual 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.

Past performance is not a guarantee of future results. Potential cash flow, returns, and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding 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 material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions, and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.

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

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