How To Evaluate A DST

How To Evaluate A DST

By | January 20th, 2020|DST|0 Comments

Delaware Statutory Trusts are considered one of the best replacement options for a 1031 Exchange. If you are a financial advisor who’s assisting a client with investing in DST or an investor looking to diversify their portfolio and increase monthly returns, the below-mentioned points are critical to analyzing whether a DST is appropriate for your investment needs.

First of all, every DST offering must have a Private Placement Memorandum, which contains essential details you need to review.

Now let’s begin by examining the loan specifications.

What is the overall loan to value ratio (LTV)?

Every investor must ensure that LTV is suitable for their debt replacement needs. Investors should evaluate the payment schedule and the LTV to decide whether the expected net operating income (NOI) and potential appreciation will bear the loan payoff requirements and sustain returns. Many investors choose all-cash DSTs and favor no debt on the property.

How much of the loan payments are interest-only?

Many investors choose to pay down the mortgage amount within the loan term, making sure that the repayment of the loan is not dependent on a stable or appreciated property value. These investors wish to realize gains from the sale of the property by having less debt to meet with the sale proceeds. Other investors choose to make minimal payments on the interest only during the life of the DST. These investors have a priority of higher cash flow throughout the life of the DST rather than hefty returns upon the sale of the property. They may also be concerned with the tax implications of decreasing their overall debt obligations that would boost their earned income totals.

What is the debt-service coverage ratio (DSCR)?

Lenders always claim that the property will generate enough to support the loan payments. However, an investor must verify that the DSCR is at a level where even if the property experiences a reduced NOI, it would not be at risk of foreclosure and put the investor’s share at risk.

What are the financial reserves?

How much cash has been put to reserve? DSTs are not permitted to accept equity contributions or borrow additional cash. Therefore, DSTs must keep aside a reserve of cash that can come handy in the event the property demands repairs or encounters unexpected expenses. An investor must determine that a moderate sum of money is put to reserve to protect the investment.

What expenses fit the use of cash reserves?

Ideally, reserves fulfill any unforeseen expenses that a property might incur. In a few cases, DST properties may have been secured with the purpose that capital would be used to add value to the property. In such cases, additional reserves are essential and will be applied to the front-end of the investment term. In the case of a value-add DST, you should verify whether the planned property improvements have the potential of raising the property’s value to justify the capital expense. You should also check what would happen to the reserves upon the sale of the assets. It is profitable if the remaining reserves get evenly distributed among the beneficiaries once the DST disposes of its assets.

Now let’s review the asset and its production expectations.

Is a single property DST suitable for portfolio diversification based on the property type and location? Would a multiple asset portfolio DST be more fitting?

It would be best if you analyzed whether the asset suits your individual diversification needs.

Can the property generate a satisfactory income stream to overcome the load within the exact timeframe?

You must examine the lease structure and rental bump schedule to establish the property’s ability to generate sufficient income.

Will the property be desirable to buyers at the end of the investment term?

It would help if you analyzed the NOI growth expectations to identify whether the property’s future capitalization rate will appeal to prospective buyers.

Bottomline

We understand that each investor has different priorities that will influence how they evaluate a DST offering. We hope these questions will help you to make an informed investment decision. Also, our experts are available for you in case you have any questions regarding your DST investment.

 

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