The benefits of owning commercial properties are hidden to none. Such properties are a great source of income for real estate investors. The revenue generated by commercial properties depends upon various factors such as location, area, job opportunities, amenities, etc. Owners of such properties enjoy a regular flow of income in the form of rent. However, as the property starts aging, the property owner needs to spend a considerable amount of time and money in managing the property. Because of this, some investors sell their properties and reinvest the proceeds in another income-producing asset. They make use of a 1031 exchange for this and invest their proceeds in 1031 commercial properties.
What does a 1031 exchange offer to investors?
A 1031 exchange lets investors defer 100% capital gains tax if they invest the sale proceeds from the old property into another like-kind property. ‘Like-kind’ states that both old and new properties must be similar, i.e., they must be used for business. For example, you can exchange an industrial property for a multi-family apartment or vice-versa. To complete a 1031 exchange, you must abide by the rules laid down by the IRS.
Problems faced by investors in locating 1031 exchange commercial properties –
- Contacts – Having a long list of real estate contact helps when locating a property. You need reliable sources that can help you find the best properties under a given budget. The bigger the contact, the easier it is to find a property.
- Inadequate knowledge of the market – The kind of market you are investing in determines the returns you will receive. There is no rocket science in saying that not every location offers the same benefits. Not having property knowledge of the market where you’re planning to invest can surely impact your investment.
- Availability – What if the property you identified is not available when you need it? The availability of properties has always been a concern for 1031 exchange investors. With more investors doing 1031 exchange transactions, it has become difficult to locate a high-performing asset when required.
Look for alternate replacement options if you cannot find an ideal replacement property.
As mentioned, finding an ideal replacement property could be a tiring job. However, to overcome this obstacle, you can invest your 1031 proceeds in different pre-packaged investment options like DSTs or TICs. A Delaware Statutory Trust (DST) is a trust responsible for buying, selling, managing, and administering real estate properties. Established under the Delaware Statutory Trust Act, DSTs allow investors to own real estate properties without the burden of managing those properties. DSTs hold large institutional-grade properties in their portfolio that may be offered to investors for as low as $100K. 1031 DST properties can be found throughout the United States at affordable prices.
No limitation on the number of shareholders
There is no limitation on the number of investors a DST could possess. Unlike TICs, where the number of investors is limited to 35, a DST can have a hundred or even more investors. This enables small investors to co-own large institutional-grade properties along with other investors, which otherwise they couldn’t afford.
How a DST works?
A DST is regulated and governed by its trustees or sponsor, which could be a real estate firm. The sponsor acquires properties under the DST umbrella and then opens it up for investors to buy shares in those properties. Since DST investment is considered as a real estate investment, it qualifies for a 1031 exchange. Any investor can invest their 1031 proceeds into a DST and defer up to 100% capital gains tax.
Top 5 Benefits of DST Investment –
- Relief from property management – DST properties come with pre-arranged property or asset managers. Such properties are managed by professionals, and investors don’t need to interfere in property management.
- Increased Cash Flow – DST investors usually receive an annual cash flow ranging from 5-7%. However, after adding capital appreciation plus the amount invested in amortizing the asset, the total annual projected returns range from 14-18%.
- Tax Advantages – Investors can either directly buy DST shares or invest their 1031 proceeds into it. If mixed with a 1031 exchange, investors can also defer up to 100% capital gains, which otherwise they would have to pay.
- Low Investment – Because of its large structure, investors don’t need to invest a large sum of money into a DST. They can start a DST investment for as low as $100K.
- Diversification – Investors looking to diversify their investment portfolio may find DST investment favorable. DST investors can split large net proceeds and invest them into different properties or assets of different grades.
You can get access to premium off-market DST properties in the property section of the website. All information like price, availability, NOI, CAP Rate, etc., are provided along with the properties. Compare different DST properties and choose the one that fulfills your requirements.