Delaware Statutory Trusts (DSTs) are an appealing option for accredited investors who want to invest in real estate as part of their 1031 exchange strategy. These investment types enable investors to co-own properties with other investors without the hassles of property management. DSTs also provide the simplest form of debt replacement, through potential tax deferral under Section 1031 of the Internal Revenue Code, where the debt replacement requirement can be satisfied without lender underwriting or liability.

There are two primary DST types: single-property DSTs and multi-property DSTs, also known as portfolios. This article will examine these two primary structures, delve into the advantages and disadvantages of each type, including tax implications, property identification challenges, diversification, and analysis, and address state income tax requirements and minimum investment amounts.

Single Properties vs. Multiple Property Portfolios

DSTs can be structured as either a single property or a multiple property portfolio. Here are the key differences between the two:

Single Property DSTs: In a single property DST, investors pool their funds to acquire one specific property. This type of DST is well-suited for investors seeking a straightforward investment with a clear focus on a single asset. The advantages of single-property DSTs include:
- Simplified Due Diligence: Investors can easily research and analyze a single property, making the due diligence process more straightforward.
- Clear Investment Strategy: The investment objectives and strategies can be more transparent and easier to understand when grappling with only one property.
- Potential for Higher Returns: If the property performs well, investors may see higher returns as there are no other properties to dilute the performance.
Multiple Property Portfolio DSTs: In a multiple property DST, investors pool their funds to acquire a portfolio of properties, which have been structured this way by the sponsor. This type of DST is designed for investors looking to diversify their real estate holdings within one particular portfolio. The advantages of multiple property DSTs include:
- Diversification: By investing in a variety of properties, investors can mitigate risks associated with a single property or market downturn.
- Economies of Scale: Multiple property DSTs can achieve cost savings through shared management and maintenance expenses across the portfolio.
- Flexibility: Depending on the portfolio, investors can experience a wider range of investment strategies, property types, and locations.

Pros & Cons

When reviewing DSTs, it is important to consider the pros and cons of owning a single property DST or a multi-property portfolio DST.

Filing Taxes:
- Single Property DST: Investors only need to file taxes in the state where the property is located. This simplifies tax filings and reduces the chance for potential errors. Some states do not have an income tax requirement, which means no filing is necessary in those states.
- Multi-Property DST: Properties within the portfolio may be located in different states, which means investors would need to file taxes in each state they receive income, except for states without income tax requirements. This can be a complicated and time-consuming process, particularly for investors who are not familiar with state-specific tax laws.
1031 Exchange Identification:
- Single Property DST: When completing exchange paperwork, the qualified intermediary, or accommodator, generally requires the DST name, address, and percentage ownership for properties the exchanger/investor plans to purchase. A single property DST streamlines the identification process as investors can easily gather the information for this one property.
- Multi-Property DST: Identifying multiple properties within a DST can be a challenge, particularly if there are numerous properties and percentages involved. This can make the 1031 exchange identification process more complex and could increase the likelihood of mistakes.
Cherry-Picking Properties:
- Single Property DST: Investors have the option to cherry-pick a single property with strong potential growth and/or income generation.
- Multi-Property DST: Due to the portfolio structure, investors have less control over the specific properties they invest in, which limits their ability to predict potential future success.
Diversification:
- Single Property DST: The minimum investment for most DSTs is $100,000, which makes it easy for investors to diversify their portfolio and invest in several single property DSTs. This may offer better diversification than investing in a multi-property DST.
- Multi-Property DST: Multi-property DSTs can offer greater diversification as they inherently spread the investment across multiple properties. However, this may not provide the same level of diversification as investing in several single property DSTs.
Future Exchanges & UPREIT Options:
- Both single and multi-property DSTs could result in the asset being sold, giving investors the flexibility to engage in another 1031 exchange.
- Both single and multi-property DSTs could be sold as an UPREIT. For more information on this, read our previously posted article: Exploring Options: Advantages & Disadvantages of an UPREIT
Due Diligence Analysis:
- Single Property DST: With only one property to analyze, single property DSTs are more straightforward to assess and understand. Investors can evaluate the historical income and expenses, potential income and expenses, and growth opportunities for just one property.
- Multi-Property DST: Assessing a multi-property DST can be more complex, as it requires analyzing multiple properties with varying characteristics, locations, markets, and financials. This can make the due diligence process more complicated for investors.

Conclusion

Both single-property and multi-property DSTs have unique advantages and disadvantages. While single property DSTs offer more simplicity and easier tax filings, multi-property DSTs provide potentially greater diversification within a single portfolio. Ultimately, the choice between the two depends on an investors’ individual goals, risk tolerance, and investment strategy. To explore the option that best aligns with your investment objectives, contact Income Property Advisors today.