What is a DST? How to compare them?
As the name suggests, a DST is normally a trust that holds, manages, administers, and sells real estate properties. DST investments are quite popular among small to medium-sized investors. The reason is evident, DSTs allow small-sized investors to own shares of interest in potentially large commercial buildings, which otherwise they couldn’t afford to own.
Generally, real estate firms, also known as sponsors, occupy properties under DST umbrella and then open it up for potential investors to buy shares in DST properties. Unlike TICs, where the number of investors is limited to 35, DSTs don’t have any limitations upon the number of investors it could possess.
Therefore, a DST with 100 investors or even more shouldn’t surprise you. Investing in DST properties can also avail you an opportunity to defer capital gains taxes using a 1031 exchange. There is no doubt that DST investments have many perks for real estate investors. However, this also makes the task of choosing an ideal DST more difficult.
As real estate investors are likely to find tons of companies that offer DST investment, it’s important to consider a few things before closing on a DST investment.
Points to remember while evaluating a DST:
- The first thing that you should take into consideration while evaluating a DST is its size. As DSTs can possess any number of investors, the bigger a DST is, the lesser would be the investment. In case of some large DSTs, an investment can start from as low as $100K.
- Another place where your attention should be is on the financial reserves. Not to mention, one of the seven limitations of DSTs barred them from accepting contributions from current or new beneficiaries. Therefore, financial reserves are important for carrying out any kind of repairing work in the future when required.
- As an investor, you must also check the loan to value ratio or LTV. LTV helps investors determine whether the expected net operating income of a DST property and its annual appreciation value will support the loan payoff requirements or not.
- Since DST investment is a kind of direct investment in real estate properties, investors must calculate the expected production of a DST property in advance.
- Another thing that you may like to consider is whether a DST can fulfill your diversification needs or not. Can a single property DST diversify your investment portfolio or do you need a DST which has multiple assets?
- What will happen to the DST property after the investment term? Will it be desirable to investors then as well? These are a few things that you need to predict in advance.
Now that you know how to evaluate a DST, we assume all your doubts related to DST investments are cleared. However, in case you require more information on DSTs, it is recommended that you consult a financial advisor or real estate expert.