Many investors who are considering a Delaware Statutory Trust (DST) do not have a complete understanding of the legal agreement or the actions that must be taken in order to ensure financial stability. In order to avoid potential risks, it is important to do your research and ask questions.
Below, is a compiled list of the most common questions investors ask when dealing with a Delaware Statutory Trust 1031. Take this list as a jumping-off point for your research and add your own questions as you go.
What kind of experience does your DST provider have with DST investments?
Some providers will claim that they have many years of experience handling Delaware Statutory Trusts. However, this could mean that they have spent many years handling only a small number of investments. So, in reality, they have not dealt with many DSTs. In order to ensure that your provider can take care of your DST, make sure that they have completed various deals and handled a number of investments in the past. As long as your DST provider has a wide array of experiences with DSTs, they will be fully capable of advising the best course of action and avoiding any potential risks along the way.
Does your DST provider utilize a variety of sponsors on their platform?
Often, DST providers will rely on a small number of DST sponsor companies to get the job done. This is because they do not allocate the necessary time to researching companies and they do not budget for diversity in their DSTs. The result of this is that investing clients can miss out on opportunities that might have otherwise been available. It is always better to have more options. Make sure that your DST provider is putting in the time and effort into finding a range of DST property investments and sponsors.
Why does your DST provider recommend a certain sponsor?
Delaware Statutory Trust providers do not always recommend sponsors because of their experience and success rates. In fact, DST providers can often be limited in their choice of sponsor companies and, thus, acquire sponsors based on marketing budgets. The best way to evaluate a sponsor recommendation is to understand how many options a provider is choosing from and do your own research into the companies they are using. Be sure that your provider has the foundational resources they need to make a genuine recommendation.
Does your DST sponsor have a successful track record?
When examining your Delaware Statutory Trust sponsor, see if they have a history of selling property investments for less than they were purchased for. Also, find out if they have ever missed cash flow projections. These kinds of reliability issues will prove important in your own Delaware Statutory Trust 1031 investment.
Does your DST advisor encourage you to diversify your investment?
It is always a good idea to diversify your DST investments. A few ways to do this is to look at property types, classes, geographies, and sponsors. Diversification does not equal multiple properties under one DST. There are some cases where one property can affect the earnings of the whole DST portfolio. Therefore, it is important to spread your investment out across offerings and sponsors. Diversification will help limit potential risks and brighten your portfolio.
Should you be investing in DSTs if you want to eventually be debt-free?
In the real estate market, DSTs are usually leveraged around a 50 to 60 percent loan-to-value ratio. This is an appropriate ratio for investors who are replacing debt from a 1031 exchange. They just need to ensure that the new property is greater than or equal to the previous property owned. Investors who want to remain debt-free should avoid DSTs with high leverages and focus on all-cash debt-free DSTs.
We would like to remind you that even though we have researched this information and believe it to be accurate and true to nature, you should remember that every form of investment, which includes real estate is speculation by its nature. This involves a risk of significant losses. Also, non-publicly traded private placements of securities can be liable to a necessary period of holding. They are designed for investors that are accredited already and will not need a liquid investment.