The raised $1.7 billion through February 2022, putting it on pace to be one of the largest years on record for DST offerings. There is no surprise that the DST market is heating up. As more and more deals become available, investors are looking for ways to defer their capital gains and benefit from the passive nature of DSTs. Although DSTs have been well received by investors as a replacement property option for 1031 exchanges, this type of investment should be more than a “plug-and-play” scenario. With the high velocity of deals and sometimes limited supply available in the market, performing the proper due diligence can help an investor ensure they aren’t exposing themselves to an unnecessary amount of risk.
In order to help you as an investor determine the good deals from the bad, Realized has provided a list of some of the questions you should consider before investing in a DST.
What Should You Know Before Investing?
Although DST offerings pass through several hands before making their way to investors, it is important to have a grasp on exactly what you’re entering into. Knowing and evaluating the details around a potential DST investment may keep you out of an unnecessarily risky offering. Here are some of the questions to ask when evaluating a DST offering:
Who is the Sponsor and what is their track record? Has the Sponsor had experience with this type of investment? How has the Sponsor managed investments in different points of the real estate cycle? Although the internet is helpful in researching a Sponsor’s background, every offering memorandum includes the Sponsor’s prior performance. However, past performance does not guarantee future results.
Are the projected financials reasonable? Returns are projected and based off a Sponsor’s own models and assumptions as to how a particular property will perform. These projections try to predict rent growth and occupancy levels, and there is typically no context to their underwriting. Referring to market reports and appraisals is a good first step in determining whether a deal’s financial projections are reasonable.
What do the fees look like? Almost every Sponsor will take certain fees such as an acquisition fee, a disposition fee, and an asset management fee. Assess the competitiveness of these fees to determine if they will detract from your return.
What is the intended exit strategy? As DSTs have gained popularity in the 1031 space, Sponsors have developed new ways to exit an investment. Sponsors utilize both third-party sales and Realized to learn more about their due diligence and portfolio construction methodologies.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.