DSTs - What kind of returns can I expect?

What kind of returns can I expect?

An important aspect for any investment is the possible returns that can be expected by the investor. With this information, investors are better able to evaluate the investment and decide whether a specific investment is worth it. The same applies to Delaware Statutory Trusts (DSTs). Investors interested in using a DST for their 1031 like-kind exchange or interested in investing cash in a DST would want to know beforehand the possible rates of return.

For DSTs there are generally two different rates of return that investors need to know about: (1) Monthly Cash Distributions and (2) Appreciation of the DST’s property.

Monthly Cash Distributions

Investors who invest in a DST can expect to receive monthly cash distributions that reflect how well the DST did for a given month. The monthly cash distribution will depend on the amount of revenue generated by the DST less all of the expenses and fees incurred for that specific month. These expenses could include any maintenance costs for the upkeep or repair of the property or properties. As for other possible fees, these could include any administrative fees that need to be paid to the DST’s sponsor, trustees, and/or managing agents.
As a reminder, the DST will not pay taxes on any of the revenue and income generated for a specific month. As mentioned in other sections, one of the tax features of DSTs is that its income flows through and to the individual investors. As such, individual investors will have to claim the income on their personal taxes and pay any income taxes that may be due.
With all that being said, the range for returns that an investor can expect is between 4% – 9% on their cash on cash monthly distributions. One major factor that contributes to the DST’s rate of return is the type of property or properties that are being held and managed by the same DST. Like any other investment vehicle, the level of risk inherent in the investment will typically correspond to a greater rate of return.
The same principle applies to DSTs. The more risky the property is, the greater the possible rate of return. On the safer side of the spectrum, properties in higher income levels will generally have a lower rate of return because the tenants will be more stable and therefore will have less risk. On the other end of the spectrum, properties located in rural or newer areas will generally have a lower rate of return because there is more risk. Tenants in rural areas might not be as stable and therefore might unfortunately make late rent payments or may miss payments altogether. As for newer areas, the fact that there is no track record to look at poses a greater risk than established areas. As such, this higher level of risk will be associated with a higher possible rate of return.

It should be noted that other aspects of the DSTs property or properties affect the investor’s rate of return. For example, a multi-family residential apartment complex will typically have a lower rate of return because people will typically pay for the residence before any other debt or creditor. On the other hand, properties that are retail, industrial, or commercial in nature will have a higher rate of return. This is because retail, industrial, and commercial tenants are more likely to default and miss on rent payments. Additionally, these kinds or properties may be more expensive to upkeep and/or repair than residential units.

As an interesting note, the self-storage industry and business model has seen higher rates of returns for DSTs. This is most likely to lower than usual maintenance and upkeep costs. Additionally, people tend to ensure that they make the storage payments in order to prevent them from losing their belongings and personal properties.

Appreciation Rate of Return

One important aspect of DSTs is that they are typically long-term investments. DSTs are considered long-term investments because the holding period for a given DST will typically be between 7-10 years. Like other real estate investments, investors hope that the property will appreciate over the holding period of that property. As such, because DSTs are considered real estate investments, the property or properties held and managed by the DST have the ability to appreciate over the 7-10 years.
Investors may receive their share of the appreciation of the property or properties when the holding period finishes and the DST sells the said property or properties. Investors’ share of any appreciation will be determined by their pro-rata interest in the DST based on their initial investment. Similar to the tax aspect for the monthly cash distributions, the DST does not pay any taxes on the sale of the property or properties. Instead, the proceeds from the sale along with the appreciation will flow to the individual investors according to their pro-rata share. Consequently, individual investors will be responsible for paying any income tax that may be due and owing.
It should be noted that investors should review the DST’s governing documents to see what happens at the end of the holding period. While a DST will likely sell the property or properties at the end of the holding period, the governing document may specify and outline a different course of action and disposition.

In any event, if the DST sells its property or properties, investors have the ability to roll the proceeds, which may include their pro-rata share of any appreciation, into another 1031 like-kind exchange. Investors may decide to roll into another DST or they may decide to roll into another like-kind property.
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