Does your real estate investment involve a Delaware Statutory Trust (DST)? If so, it’s important to be aware of the potential risks involved in this type of ownership structure. Many investors are drawn to DSTs because they offer the potential for hands-off ownership and asset diversification.
However, there are some important risks to be aware of before investing in a DST. This article will outline the top 10 risks of using a DST so that you can make an informed decision about whether this type of investment is right for you.
1. Lack of control: As a DST investor, you will have limited control over the underlying property and how it is managed. The property will be owned by the trust and managed by the trustee, so you will not have the ability to make decisions about repairs, upgrades, or changes to the property.
2. Illiquidity: DSTs are not readily traded on secondary markets, so selling your interest in the trust can be difficult if you need to access cash quickly. This illiquidity can also make it difficult to value your investment.
3. Complexity: The ownership structure of a DST can be complex, and it can be difficult to understand how your investment works. This complexity can make it harder to assess the risks and potential rewards of investing in a DST.
4. Risks of the underlying property: As with any real estate investment, investing in a DST involves the risk that the underlying property could decrease in value. This risk is magnified if the property is not well-chosen or well-managed.
5. Limited information: Because DSTs are not publicly traded, there is often limited information available about the trust and the underlying property. This can make it difficult to perform due diligence on your investment.
6. Conflicts of interest: The trustee of a DST is typically selected by the sponsor, which can create potential conflicts of interest. The trustee may have incentives to favor the sponsor over the investors, and this can lead to decisions that are not in the best interests of the trust.
7. Fees and expenses: DSTs typically have high fees and expenses, which can eat into your potential profits. Make sure you understand all the fees associated with investing in a DST before you commit to this type of investment.
8. Tax considerations: DSTs can have complex tax implications, and you may be responsible for paying taxes on your investment even if the trust does not generate any income. Be sure to consult with a tax advisor before investing in a DST.
9. Risk of loss: As with any investment, there is always the risk that you could lose money by investing in a DST. Be sure to research the trust and the underlying property before investing, and only invest an amount that you are comfortable losing.
10. Limited diversity: DSTs typically focus on a single property type, such as office buildings or shopping centers. This lack of diversity means that your investment is more susceptible to changes in the market.
Before investing in a Delaware Statutory Trust, be sure to research the risks and potential rewards carefully. This type of investment can be a great way to diversify your portfolio, but it’s important to understand the risks involved. Talk to a financial advisor if you have any questions about whether investing in a DST is right for you.
FAQ About DSTs
1. What is a DST?
A DST is a type of real estate ownership structure that allows investors to pool their resources and invest in large properties. These trusts are typically used to purchase commercial properties, such as office buildings or shopping centers.
2. How do DSTs work?
DSTs are created when a property is purchased by a trust. The trust then sells interests in the property to investors. These investors become co-owners of the property, and they are entitled to a share of the income generated by the property.
3. Who manages a DST?
A trustee is typically appointed to manage a DST. This trustee is responsible for making decisions about the property, such as repairs or upgrades. The trustee is also responsible for distributing income to the investors.
4. What are the benefits of investing in a DST?
DSTs offer a number of advantages to investors. First, they allow investors to pool their resources and purchase large properties that they could not afford to purchase on their own. Additionally, DSTs offer diversification benefits, as they can help investors to spread their risk across multiple properties. Finally, DSTs offer the potential for steady income, as they typically generate rental income from the tenants of the property.