Real estate investors often look for opportunities to invest in large institutional-grade properties that come with no management responsibilities. Managing your investment property could be a strenuous task as it requires a considerable amount of time and money. As the property starts aging, it requires repairing and maintenance work on a regular basis. In such a scenario, the investor has no option but to sell their property and invest the proceeds in other properties or assets. However, selling your investment property because of rising maintenance costs may not be the wisest option. Instead, you can invest in NNN or DST properties, an option available for 1031 Exchange investors, and enjoy management-free investment.
NNN Lease Investment –
A popular single-tenant arrangement that requires the tenant to pay all major property expenses along with the base rent. You may better know about a gross lease where the tenant is only required to pay the property rent, which is then used by the investor or property owner to pay off property bills. However, a NNN lease removes this burden from an investor’s shoulders by asking the tenant to pay the property expense. Property expenses that a tenant covers in a NNN lease include insurance fees, property taxes, and maintenance costs (together known as the ‘three nets’).
Understanding DST Investment Structure –
A Delaware Statutory Trust or DST is a private governing trust responsible for buying, managing, and administering income-producing real estate properties. A DST is established by first filing a Certificate of Trust with Delaware Division of Corporations, which is governed by Chapter 38, Part V-Title 12 of annotated Delaware Code. DSTs have large institutional-grade properties in their portfolios. DST shares are often offered as real estate securities to 1031 investors. DSTs let several investors invest in one asset, and a single DST may have a hundred or even more investors. Investors can only purchase DST shares through a real estate broker or agent.
Three Key Benefits of A DST Investment –
- Zero landlord responsibility – As a DST investor, you don’t need to look after your property. All DST properties are backed by professional asset managers.
- Low investment – Due to its large structure, you may find an investment option for as low as $100K. This allows small investors to own large institutional-grade properties without any liabilities.
- Diversification – You can split your sale proceeds and invest in different DST properties or assets. It gives you an opportunity to expand your investment by adding properties of different grades.
Besides these, a 1031 DST property also comes with benefits, such as increased cash flow, multiple tax advantages, pre-arranged and non-recourse financing, etc.
You must look at each of these points if you’re planning a 1031 Exchange or searching 1031 exchange properties for sale.
Don’t try to exchange two different nature of the property. Only like-kind assets qualify for a 1031 exchange.
The IRS considers properties to be like-kind if used for the same purpose, for generating revenue, irrespective of grade or quality. So, you must be using your old property for business purposes, and your new property must also be an income-producing asset.
Start hunting for a replacement property from the first day.
Once you get the sale proceeds, you have only 45 days to identify your new property. In the world of 1031 exchanges, it’s called the Identification Period. Don’t expect extension coming your way if you fail to show up with property identification in the given time. You can choose as many income-producing properties as you like (the price of the new properties should not exceed the selling price of the old property).
Close your 1031 exchange in 180 days or get disqualified.
Now all the properties you identified, it’s time to purchase them. You cannot take more than 180 days to complete your transaction (including the identification period).
Hire a Qualified Intermediary (QI) on the first day.
A Qualified Intermediary facilitates your 1031 exchange. He is the one who holds the sale proceeds from your old property, also helps with property identification, and on the closing day, he is the one who acquires the replacement property. Your QI stays with you throughout your 1031 exchange.
The title of both properties must have the same name.
If you were the owner of the property you sold, you have to be the owner of the new property too. You cannot transfer the property title to anyone else. Both relinquished, and replacement property must have the same owner.
Try to purchase a property that’s worth the same as your old property.
You can acquire replacement property of higher value than the previous one, but that will complicate the situation a bit. You will have to look for a lender or invest cash if the new property’s price exceeds the value of the old property.
Don’t keep both properties at one time.
Under no circumstance during your entire exchange, you can keep the properties (new and the old one). In case you find an investment opportunity that you must act on before selling your relinquished property, you must have someone else holding the legal title. For such arrangements, professionals use the term ‘qualified parking arrangement.’