A 1031 Delaware Statutory Trust experiment

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cryingshame
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A 1031 Delaware Statutory Trust experiment

Post by cryingshame »

We have sold our paid for Florida Townhouse and did a 1031 exchange into 3 dst's We are 63 years old and when we retire do not want to deal with this rental we bought in 2007. As someone who discovered bogleheads in 2017 the idea of now going into a high fee product again was a hard decision.

This is not money we would have put in stock market so we feel it's like making aprox 4% more(hopefully more with the tax benefits) on 100,00 dollars, which would have been the approx. tax hit.

We of course were weighting the capital gains/depreciation recapture tax and Irmaa/ aca all that.

We can be a test case for those interested. I know this is more a subject for biggerpockets but my guess is many here will at least consider this in their future and when I have searched it not many current threads come up. :sharebeer
Last edited by cryingshame on Sun Feb 19, 2023 3:09 pm, edited 1 time in total.
petulant
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Re: A 1031 Delaware Statutory Trust experiment

Post by petulant »

Could you explain more about the process? Was the DST sponsored by a particular REIT of some kind, or is just an independent investment vehicle? Were you able to shop among several DST options, or did you just have one promoter go over it with you? Are you taking an equity position in real estate via the DST or does it function more like a preferred or credit return? Do you have an expected exit from the DST, like the ability to take your basis out in 7-10 years while leaving only the gains in? Did you look into whether your heirs will get a step-up in basis from the DST when you pass away? Was the only alternative a complete sale?
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cryingshame
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Re: A 1031 Delaware Statutory Trust experiment

Post by cryingshame »

petulant wrote: Sat Feb 18, 2023 8:17 am Could you explain more about the process? Was the DST sponsored by a particular REIT of some kind, or is just an independent investment vehicle? Were you able to shop among several DST options, or did you just have one promoter go over it with you? Are you taking an equity position in real estate via the DST or does it function more like a preferred or credit return? Do you have an expected exit from the DST, like the ability to take your basis out in 7-10 years while leaving only the gains in? Did you look into whether your heirs will get a step-up in basis from the DST when you pass away? Was the only alternative a complete sale?
Your dealing with brokers who specialize in these dst's. There is allot of them and I feel you need to talk to 4 or 5 of them to get a feel for what they suggest for your needs. Most deal with the same dst sponsor's so you get some of the same choices but some have their sponser dst's so they can have a conflict of interest. You lose control they decide when to exit. Your distributions are estimated but can be suspended or stopped if the property hit's an unexpected challenge. Yes your taking on fractional ownership.

I took on just a little debt on one property. More debt more tax benefit's more risk.

I did a complete sale into the three dst's I do not know the answer to that question.
RossR
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Re: A 1031 Delaware Statutory Trust experiment

Post by RossR »

Great discussion...A couple of follow up points and clarifications....

1. You're dealing with brokers who specialize in these dst's.
There are two types of financial professionals that specialize in dst's. 1. Brokers who are commission based and 2. RIA's who are fee based.

DSTs have baked in commissions that can range from 6%-8%, depending on the Sponsor and the offering (this is shown in the PPM). RIA's do not accept this commission. Instead, the commission amount is grossed up and added to your equity invested. For example, you invest $1Million cash into a DST. Working with an RIA, your closing statement will reflect the grossed up amount, $60,000-$80,000, such that Day 1 your total equity is $1,060,000-$1,080,000. By the way, your cash flow is based on the fully grossed up amount, which is a nice bonus. RIA's charge an AUM fee, which is usually deducted from the DST cash flow. So, if your DST generates 5% distribution, you would net 4%, assuming the RIA charges 1% fee annually.

RIA's are not conflicted with promoting DST A which pays 8% commission vs. DST B which pays 6% commission. If your distributions are suspended or stopped if the property encounters an unexpected challenge, then the RIA doesn't get paid either. Also, what many DST investors are not aware of is the commission amount is deducted on the back end when the DST Sponsor sells the property years later. So, in the example above, if the property value appreciated 10%, the DST Sponsor deducts the commission (and disposition fee) from the gross sales proceeds so you end up with substantially less than a 10% gain. For these reasons, many argue that the RIA model is better aligned with the investor's best interest.


2. I took on just a little debt on one property. More debt more tax benefit's more risk.
Just to clarify, the debt associated with DSTs is non-recourse debt. This means as the investor, you are not personally liable for the debt taken on by the DST. Of course, a separate risk posed to the DST itself (and your equity invested) could be if the terms of the debt are not favorable or the Sponsor defaults on debt service.

Also, carefully review the track record of the DST sponsor. How many DSTs have gone "full cycle", has the sponsor managed DSTs through different market cycles, what is the exit strategy for the DST (value add, 721UPREIT, etc) and how does this integrate with your overall financial/estate plan.

Hope that helps!
desi_kalle
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Re: A 1031 Delaware Statutory Trust experiment

Post by desi_kalle »

RossR wrote: Mon Feb 20, 2023 8:15 am By the way, your cash flow is based on the fully grossed up amount, which is a nice bonus. RIA's charge an AUM fee, which is usually deducted from the DST cash flow. So, if your DST generates 5% distribution, you would net 4%, assuming the RIA charges 1% fee annually.
This is a very key point that you highlighted. There are also RIAs that will charge a fixed % upfront without any annual fees. Please NEVER work with a DST Broker and ALWAYS go the RIA route. Saving 4-6% for typical DST transactions $ amounts is HUGE. I learned the hard way on my first DST transaction. Don't trust the book authors who also sell DSTs.
RossR wrote: Mon Feb 20, 2023 8:15 am If your distributions are suspended or stopped if the property encounters an unexpected challenge, then the RIA doesn't get paid either.
Are you suggesting that the annual AUM fees would not still be "accruing" in this scenario? Ie. if distributions are paused for 2 years and then restarted, would the RIA not claw back the AUM fees?
RossR wrote: Mon Feb 20, 2023 8:15 am Also, what many DST investors are not aware of is the commission amount is deducted on the back end when the DST Sponsor sells the property years later. So, in the example above, if the property value appreciated 10%, the DST Sponsor deducts the commission (and disposition fee) from the gross sales proceeds so you end up with substantially less than a 10% gain.
Can you clarify this point? When the property sells, there will of course be a sales commission which is paid out of the proceeds. This is the same as any RE sales transaction. I'm probably misunderstanding the nuance you are trying explain.
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doughmeetsoil
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Re: A 1031 Delaware Statutory Trust experiment

Post by doughmeetsoil »

cryingshame wrote: Sat Feb 18, 2023 7:38 am We have sold our paid for Florida Townhouse and did a 1031 exchange into 3 dst's We are 63 years old and when we retire do not want to deal with this rental we bought in 2007. As someone who discovered bogleheads in 2017 the idea of now going into a high fee product again was a hard decision.

This is not money we would have put in stock market so we feel it's like making aprox 4% more(hopefully more with the tax benefits) on 100,00 dollars, which would have been the approx. tax hit.

We of course were weighting the capital gains/depreciation recapture tax and Irmaa/ aca all that.

We can be a test case for those interested. I know this is more a subject for biggerpockets but my guess is many here will at least consider this in their future and when I have searched it not many current threads come up. :sharebeer
Hello cryingshame

I am helping someone older on DSTs who is not able to decide if they should just take the tax hit from sale or get into DSTs with their specific risks and fees or stay invested in high income RE. Since you have done this recently, I would appreciate if you could share your thoughts.

How is the return from DST sponsor's working in the rising interest rate environment?
If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?
RossR
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Joined: Sun Dec 19, 2021 6:28 am

Re: A 1031 Delaware Statutory Trust experiment

Post by RossR »

Hi,
Hope I can help clarify...
"If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?"
The way we work as an RIA is your $100K gets invested in full...plus you are credited the commissions I don't take (5%-8%); therefore your equity on the closing statement will show $105,000-$108,000 (depending on the commission baked into your DST). I get paid 1% annually, as an AUM fee, from the DST cash flow.
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cryingshame
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Re: A 1031 Delaware Statutory Trust experiment

Post by cryingshame »

doughmeetsoil wrote: Tue Mar 05, 2024 4:04 pm
cryingshame wrote: Sat Feb 18, 2023 7:38 am We have sold our paid for Florida Townhouse and did a 1031 exchange into 3 dst's We are 63 years old and when we retire do not want to deal with this rental we bought in 2007. As someone who discovered bogleheads in 2017 the idea of now going into a high fee product again was a hard decision.

This is not money we would have put in stock market so we feel it's like making aprox 4% more(hopefully more with the tax benefits) on 100,00 dollars, which would have been the approx. tax hit.

We of course were weighting the capital gains/depreciation recapture tax and Irmaa/ aca all that.

We can be a test case for those interested. I know this is more a subject for biggerpockets but my guess is many here will at least consider this in their future and when I have searched it not many current threads come up. :sharebeer
Hello cryingshame

I am helping someone older on DSTs who is not able to decide if they should just take the tax hit from sale or get into DSTs with their specific risks and fees or stay invested in high income RE. Since you have done this recently, I would appreciate if you could share your thoughts.

How is the return from DST sponsor's working in the rising interest rate environment?
If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?
doughmeetsoil

Even though interest rates have went up I still get the same 4%. Again I feel I am still doing ok with the tax right offs and I making the 4% on what i would have lost to recapture/capital gains. Has not affected distributions yet but this industry is sending allot of warnings about increased insurance cost that could affect distributions.

Also, I feel that breaking my condo sale into three properties that will be sold over different years will help me on Irmaa down the road ...One more update my tax lady hated me for this. ha really complicated. Should be better next year.

cryingshame
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cryingshame
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Re: A 1031 Delaware Statutory Trust experiment

Post by cryingshame »

RossR wrote: Wed Mar 06, 2024 7:27 pm Hi,
Hope I can help clarify...
"If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?"
The way we work as an RIA is your $100K gets invested in full...plus you are credited the commissions I don't take (5%-8%); therefore your equity on the closing statement will show $105,000-$108,000 (depending on the commission baked into your DST). I get paid 1% annually, as an AUM fee, from the DST cash flow.
RossR

Where were you when I was considering this :happy .. It will take me three to seven years to know if this was a decent move, but love not being a landlord.
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doughmeetsoil
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Re: A 1031 Delaware Statutory Trust experiment

Post by doughmeetsoil »

RossR wrote: Wed Mar 06, 2024 7:27 pm Hi,
Hope I can help clarify...
"If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?"
The way we work as an RIA is your $100K gets invested in full...plus you are credited the commissions I don't take (5%-8%); therefore your equity on the closing statement will show $105,000-$108,000 (depending on the commission baked into your DST). I get paid 1% annually, as an AUM fee, from the DST cash flow.
Thanks for the response RossR. Say the investment is 100k, commission is 5k and the investment pays 5%. So 105k is invested at 5%. Annual return is $5025. RIA will take 1% of 105k or $1050 out of this return leaving $3975 to be distributed to the investor. This becomes close to 4% cash flow on the original investment of 100k. Have I got it right?
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doughmeetsoil
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Re: A 1031 Delaware Statutory Trust experiment

Post by doughmeetsoil »

cryingshame wrote: Tue May 07, 2024 4:56 pm
doughmeetsoil wrote: Tue Mar 05, 2024 4:04 pm
cryingshame wrote: Sat Feb 18, 2023 7:38 am We have sold our paid for Florida Townhouse and did a 1031 exchange into 3 dst's We are 63 years old and when we retire do not want to deal with this rental we bought in 2007. As someone who discovered bogleheads in 2017 the idea of now going into a high fee product again was a hard decision.

This is not money we would have put in stock market so we feel it's like making aprox 4% more(hopefully more with the tax benefits) on 100,00 dollars, which would have been the approx. tax hit.

We of course were weighting the capital gains/depreciation recapture tax and Irmaa/ aca all that.

We can be a test case for those interested. I know this is more a subject for biggerpockets but my guess is many here will at least consider this in their future and when I have searched it not many current threads come up. :sharebeer
Hello cryingshame

I am helping someone older on DSTs who is not able to decide if they should just take the tax hit from sale or get into DSTs with their specific risks and fees or stay invested in high income RE. Since you have done this recently, I would appreciate if you could share your thoughts.

How is the return from DST sponsor's working in the rising interest rate environment?
If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?
doughmeetsoil

Even though interest rates have went up I still get the same 4%. Again I feel I am still doing ok with the tax right offs and I making the 4% on what i would have lost to recapture/capital gains. Has not affected distributions yet but this industry is sending allot of warnings about increased insurance cost that could affect distributions.

Also, I feel that breaking my condo sale into three properties that will be sold over different years will help me on Irmaa down the road ...One more update my tax lady hated me for this. ha really complicated. Should be better next year.

cryingshame
Thanks :sharebeer
RossR
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Re: A 1031 Delaware Statutory Trust experiment

Post by RossR »

doughmeetsoil wrote: Thu May 09, 2024 3:37 pm
RossR wrote: Wed Mar 06, 2024 7:27 pm Hi,
Hope I can help clarify...
"If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?"
The way we work as an RIA is your $100K gets invested in full...plus you are credited the commissions I don't take (5%-8%); therefore your equity on the closing statement will show $105,000-$108,000 (depending on the commission baked into your DST). I get paid 1% annually, as an AUM fee, from the DST cash flow.
Thanks for the response RossR. Say the investment is 100k, commission is 5k and the investment pays 5%. So 105k is invested at 5%. Annual return is $5025. RIA will take 1% of 105k or $1050 out of this return leaving $3975 to be distributed to the investor. This becomes close to 4% cash flow on the original investment of 100k. Have I got it right?
Yes, this is the correct breakdown based on the facts presented. However the commissions for many DSTs is north of 5% cited in your example. I have found that on average the commissions are closer to 6%, with some DSTs lower and some higher. Hope that helps!
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doughmeetsoil
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Re: A 1031 Delaware Statutory Trust experiment

Post by doughmeetsoil »

RossR wrote: Fri May 10, 2024 8:12 am
doughmeetsoil wrote: Thu May 09, 2024 3:37 pm
RossR wrote: Wed Mar 06, 2024 7:27 pm Hi,
Hope I can help clarify...
"If you gave 100k to a RIA for DSTs, how much of it is expected to be invested vs how much is used in fees?"
The way we work as an RIA is your $100K gets invested in full...plus you are credited the commissions I don't take (5%-8%); therefore your equity on the closing statement will show $105,000-$108,000 (depending on the commission baked into your DST). I get paid 1% annually, as an AUM fee, from the DST cash flow.
Thanks for the response RossR. Say the investment is 100k, commission is 5k and the investment pays 5%. So 105k is invested at 5%. Annual return is $5025. RIA will take 1% of 105k or $1050 out of this return leaving $3975 to be distributed to the investor. This becomes close to 4% cash flow on the original investment of 100k. Have I got it right?
Yes, this is the correct breakdown based on the facts presented. However the commissions for many DSTs is north of 5% cited in your example. I have found that on average the commissions are closer to 6%, with some DSTs lower and some higher. Hope that helps!
Yes this helps. Thank you for the information. Is 1% of AUM is non-negotiable fee charged by the RIA? Or do different RIAs offer different fee schedules? How are RIAs different in terms of reliability, support etc.
RossR
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Re: A 1031 Delaware Statutory Trust experiment

Post by RossR »

RIA fees can be negotiated. However, most RIAs have a set fee schedule that decreases the larger the investment in the DST, similar to Assets Under Management fees for traditional investments. I would encourage you to talk to different RIAs to better understand the scope of services provided with a DST. What’s their due diligence process? Do they analyze your balance sheet, Schedule D, and taxable income to determine if taking some boot at a lower tax rate is possible? Do they help with understanding & explaining the depreciation each year? You get the idea 😎.
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