Partner Cory Thomas’ Journey as a Real Estate Investor

For over twenty-eight years, I have been deeply involved in real estate investing. While attending San Diego State University, where I earned a degree in psychology and minor in real estate, my journey began at eighteen years old when I received my real estate license and worked as a realtor. Shortly after graduating, I purchased my first property, a townhome near the University of California, Irvine, and quickly discovered my passion for real estate. Since then, I have owned approximately 1,000 units across various property types, including single-family residences, condos, townhomes, multifamily properties, mobile home parks, and commercial real estate. My experience also includes fractional ownership of thirty TIC and DST investments. This experience makes me an investor, advisor, and active participant in this space.

In addition to real estate ventures, I attended Chapman University’s Fowler School of Law and earned my JD. Although I did not take the bar exam, my legal education has been invaluable in navigating the complexities of real estate investing. I am a lifelong learner, especially as it relates to the intricacies of 1031 exchanges, real estate investing, estates, and trusts. I aim to be well-informed and equipped to assist real estate investors in making the best decisions for their specific situations.

The DST Solution

DSTs (Delaware Statutory Trusts) are a solution for investors seeking management-free, 1031 exchange-qualified investments. The benefits include:

• No Management Involvement: Investors can enjoy a truly passive income stream, with professional managers handling all aspects of property management.
• Easy Transactions: The DST structure streamlines the investment process, making it simpler for investors to diversify their portfolios.
• No Lender or Loan Hassles: Acquiring loans on investment properties can be a tedious process, filled with lender requirements and strict underwriting. In contrast, with DSTs, the Business Trust is the borrower, not the individual investor. This means no personal underwriting requirements, and investors still benefit from the leverage.
• Diversification: DSTs allow investors to spread their risk across multiple properties and geographic regions.
• Professional Management with Transparent Reporting: The leading DST sponsors in the industry provide transparent, clear, and consistent communication about your investments.
• Potential for Large Profits: In the right economic conditions, with the right property and location, DSTs deliver cash flow returns/distributions while being held and can produce substantial profits upon sale.
• Economies of Scale & Access to Properties: DST sponsors pass through discounts on significant services and expenses through economies of scale. They also have access to/offer larger properties that individual investors could not afford on their own.

These benefits align with investors aiming to defer capital gains taxes, leave management, and build their portfolios.

DST Investment Risks

While DSTs are attractive, no investment is without its risks. Several factors can undermine the potential success of a DST investment:

• Bad Management: Poor management can lead to operational inefficiencies, reducing the profitability of the investment. Unfortunately, the industry has its share of unethical and fraudulent sponsors who mismanaged and misappropriated funds.
• Poor Property Selection: Selecting the wrong property can expose investors to unnecessary risks, especially if the property is in a declining market.
• Lack of Economic Awareness: Both macroeconomic conditions and local market dynamics can drastically impact the performance of a DST investment. A failure to account for these factors can lead to disappointing returns.
• Insufficient Property Study: Not all properties are created equal. Thorough due diligence is crucial in ensuring that the property aligns with your investment goals.
• Sponsors Lacking Transparency: Sponsors who are not 100% transparent in their marketing materials, PPMs, and reporting almost always cause problems for investors. Transparency is non-negotiable when choosing a sponsor.

Investors should seek out sponsors who maintain cash flows consistent with market rates and who have a track record of ethical, transparent dealings.

To learn more about the red flags in DST sponsorship, visit our article: Investing in Delaware Statutory Trusts (DSTs) with Problematic Sponsors

The Importance of a Knowledgeable Advisor

When investors reach out to me for advice, I do not sell DSTs as the only solution. Instead, I first assess their situation to determine their best options, given their goals and management preference. In some cases, the ending determination does not involve DSTs because it is not a suitable vehicle for their current needs. Since I own DST and non-DST real estate investments, I enjoy these conversations and provide transparent advice without regard for what is in it for me.

Sometimes it is more beneficial for investors to hold onto their properties long-term rather than selling and exchanging. For example, this is especially true for California investment properties, which are protected from tax rate increases under Proposition 13. This protection gives California investors a much lower tax rate than they would face if they sold and exchanged into another property (with certain exceptions under Proposition 19, approved by voters in 2020).

If after careful consideration, DSTs emerge as the best option, I only recommend the most suitable DSTs with the best sponsors. By recommending the DSTs I would invest in, the investor’s interests are aligned with my own.

Safe Asset Types for Inflationary Investments

As we navigate an inflationary environment, certain asset types have proven to be more resilient. The following asset types are ones I often recommend to my clients:

• Multifamily: These properties perform well in various economic conditions, particularly in growing markets with strong demand for rental housing. The value of our homes has increased as many continue to work from home or in a hybrid capacity. Our homes are more valuable from a utility standpoint as this trend continues.
• Self-Storage: Self-Storage facilities have shown to be relatively recession-resistant as people often downsize or need extra storage during economic downturns.
• Industrial: The industrial sector, particularly logistics and warehousing, has been bolstered by the rise of e-commerce and continues to be a strong performer.

For all of these properties, it is important they are located in areas with the following qualities:

• Growth: This includes job, income (higher paying/skilled job), and population growth.
• Close-In: Properties that are close to economic centers and natural amenities.
• Barriers to Entry: Fully built-out areas to minimize market competition.

Proceed with Caution & Recognize Potential

DSTs can be a suitable option but require careful selection, diligent research, and a partnership with trustworthy sponsors and advisors. While no industry is perfect, with the right approach, the potential for success is significant.

If you are considering DSTs, work with an experienced advisor who is also an investor. This ensures that your advisor’s interests are aligned with yours and that you are receiving guidance from someone who understands the complexities of the DST market firsthand.

Invest wisely, be cautious of red flags, and focus on the asset types that are best suited to today’s economic landscape. With the right strategy, DSTs can be a valuable addition to your investment portfolio.

If you have questions or would like to discuss further, contact us today by clicking here.