When it comes to investing in real estate, there are various approaches to consider. Two popular investment methods include Real Estate Investment Trusts (REITs) and Delaware Statutory Trusts (DSTs). Both options offer unique benefits and advantages. In this article, we will explore the key differences between these investment options and help you determine which one is the right choice for you.
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust (DST) is a legally-recognized trust that allows investors to pool together their 1031 exchange proceeds into the trust for real estate investment purposes. Under the DST umbrella, properties are purchased and managed, and investors receive cash distributions from the acquired properties. It's important to note that investing in DSTs requires accreditation, meaning investors must have a net worth of over $1 million or an income exceeding $200,000 ($300,000 if married and filing jointly).
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust (REIT) is an organization that acquires, manages, and sells real estate investment properties. Investors who purchase shares of a REIT benefit from the generated income of the investment properties. REITs offer investors the opportunity to own a diverse portfolio with various properties across different markets. There are two types of REITs: public and private. Public REITs are traded on the stock exchange and offer liquidity, while private REITs are not publicly traded and have restrictions on investment liquidation.
Similarities between REITs and DSTs
While REITs and DSTs are different investment structures, they share some similarities. Both options are considered passive investments as investors are not responsible for directly managing the properties. Additionally, private REITs and DSTs are illiquid investments that cannot be sold on the open market.
Differences between REITs and DSTs
There are several key differences between REITs and DSTs that set them apart. One significant distinction is the required capital for investment. DSTs typically require substantial capital, with minimum investments ranging from $25,000 for cash investments and $100,000 for 1031 exchange investments. On the other hand, private REITs often start with a lower investment of around $1,000 to $5,000.
Another important factor to consider is the associated fees. DSTs involve various fees, including selling commissions, wholesaling fees, and acquisition fees. These fees can impact the return on investment. REITs also have fees, which vary depending on whether they are publicly traded or non-traded. Publicly traded REITs involve brokerage fees, while private REITs have substantial up-front fees and commissions that decrease the value of the investment.
Objectives and Risks of Investing in REITs and DSTs
Investors who opt for DSTs are typically seeking income-producing properties with a long-term holding period. DSTs allow for 1031 reinvestment and offer potential tax benefits. On the other hand, investing in a REIT means owning a portion of a company that owns real estate, which eliminates the eligibility for 1031 reinvestment.
Both DSTs and REITs carry risks, including the possibility of losing funds due to market volatility or economic downturns. Cash flow in DSTs is subject to property vacancies and increased operating expenses. Similarly, investing in private REITs and DSTs can result in decreased returns if properties are sold at a lower value. Public REITs, being subject to stock market fluctuations, are generally riskier and more volatile.
Conclusion
While there are similarities between REITs and DSTs, there are also significant differences that make each option unique. When deciding between the two, it's essential to weigh the costs, benefits, and risks associated with each option. Consider your investment goals and align them with the investment structure that best suits your needs. Whether you choose a REIT or a DST, always conduct thorough research and seek professional advice before making any investment decisions.
Note: The information provided in this article is for general information and educational purposes only. It is not guaranteed to be accurate or complete and should not be used as the sole basis for investment decisions. Always consult with a financial advisor or investment professional to determine the best investment strategy for your specific circumstances.