4 Risks of DST Properties

At Archer Investors, we are a team of investment professionals who specialize in a very specific niche: helping property owners to move on from rental properties into more diversified institutional scale investments. Our founder, Leslie Papas, has helped countless people to profit from wise investments, and she has appeared on CNN, ABC, CBS, NBC, and more because of her incredible work in this realm of financial investment.

Of all the investments we specialize in, Delaware Statutory Trust (DST) Investments are by far the most prolific. Most of our business is based on DST Investments, and because we have made this our dedicated specialty, there’s no one else you can turn to that will provide better resources and opportunities.

With that being said, none of that means much if you don’t know what a DST Investment is. In a nutshell, a DST Investment is a type or replacement property alternative for accredited investors seeking to defer their capital gains taxes. In other words, instead of paying taxes on the money you make from selling your rental property, you can transfer ownership to shares in a DST property, which is managed independently. DST properties allow you to avoid capital gains taxes, and gain rental property income without having to deal with the responsibilities of management. What’s the catch?

Well, just like any other investment, Delaware Statutory Trust Investments include their own fair share of risks. While many people have greatly benefited from the DST properties we have led them to, they all did so knowing the risks. Here are some of the most important risk factors to keep in mind if you’re considering this unique investment:

The Risks of DST Property Investments

Inherent Real Estate Risk

One of the most important things to remember about DST investments is, at the end of the day, they’re still real estate. They may be regulated and sold as a security, but ultimately your money is coming from a real estate property. The money that comes in depends on occupancy, market conditions, and so on.

Your DST property doesn’t have any more or less risk than any other type of real estate — it simply shares the same risks that all real estate has in common. Some of the risks inherent in real estate include:

  • Drops in the local real estate market
  • A decline in the economy
  • Natural disasters
  • Property damage

Those are just some of the obvious risks — there are many more factors that could affect the value of real estate, some of them completely unpredictable.

How to Mitigate This Risk

The best way to mitigate real estate risk is to do copious research about the property you’re investing in. For example, if your property is sitting right on top of an active fault line, you shouldn’t be surprised if an earthquake comes in and wreaks havoc.

In the case of DSTs, it’s also important to find a DST sponsor who has a high standard of quality for their properties. At Archer Investors, we only introduce investors to DST properties that have been extensively vetted and researched.

Operator Risk

Traditional real estate investments carry risk because their value can change depending on market conditions. But rental properties take this a step further — to maintain a high value and positive return, they require good management. A mismanaged rental property can lose many in many ways — mismanagement can result in unhappy clients who abandon their lease, and ill-conceived spending can cause any property to hemorrhage money.

Many rental property owners handle management themselves, and if you’re here on our blog right now, you likely fall into that category. But with a DST, you’re investing into a property that’s independently managed; this can definitely be a wild card.

How to Mitigate this Risk

While it definitely wouldn’t be the right move to just blindly trust anyone with property management duties, there are several steps you can take to ensure that you’re working with someone who is trustworthy, professional, and reliable.

First off, you should always make it a priority to meet your DST sponsor. At Archer Investors, we give you access to every sponsor we work with, allowing you to get a good read on them, and analyze their successes. We hold tours where you can meet three sponsors in Southern California in one day, and we also host weekly webinars and conference calls where we share the experience, performance, and strategies of our DST sponsor partners.

By working with Archer Investors and doing your own diligent research, we’re confident that you’ll find a quality sponsor who will put your concerns about operator risk to rest.

Interest Rate Risk

With the two risks above, we do a lot at Archer Investors to ensure that they’re mitigated as much as possible. But interest rate risk is something that we don’t have as much power over, and you’ll have to decide for yourself whether or not this is a major concern.

There are certain types of DST properties that accommodate corporate tenants. We’re talking retail buildings, office spaces, etc. These properties are attractive because they’re generally long-term, with a virtual guarantee that you’ll be getting the lease payments in full, and on-time. The long-term nature of these properties promises security and ensures that the rate won’t go down, but there’s an important side effect — these same conditions prevent the yield from shifting upward.

It’s possible for a long-term office lease to have an interest rate yield of 5%. In the following years, suppose the market changes and most properties of a similar nature now have interest yields of 7% – 8%. For obvious reasons, it’s not ideal when your property is locked at a lower value than other comparable properties on the market.

How to Mitigate This Risk

If you’re worried about interest rates fluctuating against your favor, the best thing you can do is invest in properties that are more flexible and responsive to market changes. We recommend multifamily apartments and small retail units, because these allow you to raise and lower rents in accordance with the market. At Archer Investors, we have a wide variety of shorter-term DST sponsors we can introduce you to.

Liquidity Risk

A DST Investment can be a prudent financial decision for many reasons, and one that pays immense dividends. But investors beware — DSTs are a strictly illiquid investment! When you invest in one, you’re signing yourself up for a long-term commitment. To get the proper return from your investment, you’ll want to hold onto your shares for the full period, which usually ranges from five to seven years. Because you own shares of a property instead of owning the property itself, you can’t just throw it on an MLS, sell it, and cash out.

If liquid capital is in limited supply, it’s possible that a DST Investment might not be the best choice for you. That being said, it can still pay major dividends. If you’re unsure on whether or not you’re a good candidate for DST Investments, be sure to contact us — we can evaluate your situation and help you make the best choices according to your circumstances.

It’s not impossible to get out of a DST Investment before the end of the holding period, but it’s also not advised. You can sell your shares back to your sponsor or to another investor, but these will likely sell at a discount; you’re almost always better off waiting the full period.

How to Mitigate This Risk

Illiquidity is a given in DST Investments. When it comes down to it, all you can really do is decide whether or not you really want to invest. You know your financial situation better than anyone else, and if you have a major need for liquid capital, you might have a good reason to be skeptical about this. But like we mentioned above, this is exactly why Archer Investors exists — to help people like you to understand what their options are and make the best investments. If you ever have doubts. We can help.

Find a DST Sponsor Today

Despite the risks outlined in this blog post, DST 1031 Exchanges can be extremely profitable investments, and at Archer Investors, we’re ready to connect you with the best DST sponsors in the market. Instead of throwing away a bunch of your hard-earned money at capital gains taxes, consider a DST 1031 Exchange to grow your wealth even more without the crushing responsibilities of property management. Ready to get started? All you have to do is contact us today.