How to Diversify your Portfolio With 1031 DSTs

From: Corcapa 1031 Advisors
Date: December 5, 2020

How to Diversify your Portfolio With 1031 DSTs

Many investors encounter a wide variety of recommendations regarding what they should and shouldn’t do with their portfolios. Everyone has heard the expression “Don’t put all your eggs in one basket,” and for property investors in particular, this phrase should be near and dear. In less metaphorical terms, diversify your real estate investment portfolios.

Delaware Statutory Trusts (DSTs) were created to help investors accomplish just that, but they can also provide suitable solutions to a host of other challenges you might face in the real estate market, specifically within the parameters of a 1031 exchange.

What is a 1031 Exchange?

In 1031 exchange transactions, investors are able to defer Capital Gains taxes by reinvesting the proceeds from the relinquished property into a like-kind replacement property. However, as the market can be subject to adverse cycles and lack of inventory, DSTs can provide a series of more flexible options to accommodate your 1031 exchange. Since DSTs are pre-arranged replacement properties that can close in as little as three business days, and offer a variety of asset classes (Multifamily, Industrial, Senior Housing, Self-Storage, Triple Net Leased Retail and Office), they may not only ease the constraints of the 45-day identification time frame and limited replacement property options, but lower your overall risk through diversifying your investments into different types of properties and locations.

For example, an investor with $3 million of equity in their 1031 exchange could invest into six different DSTs for significant diversification that looks like this:

• $500,000 into a class A luxury apartment community in Alexandria, VA.
• $500,000 into an industrial building 100% occupied by Amazon in Colorado.
• $500,000 into a class A apartment community in Jacksonville, FL.
• $500,000 into a self-storage facility in Naples, FL.
• $500,000 into a self-storage facility in Charleston, SC.
• $500,000 into a 55+ active living community in a nicer Chicago suburb.

Some of these assets can be debt-free to reduce risk, and some can have moderate non-recourse debt which creates new depreciable basis to shelter cash flow.

Benefits of Diversifying with Delaware Statutory Trusts

With DSTs you can spread out the equity from your sale into multiple other properties, instead of putting all the proceeds back into a single property and leaving you vulnerable to all the risks of that particular asset type, local market, and building — bringing us back to our eggs and baskets discussion.

DSTs can also proactively expose you to more opportunities for return. Just as a diversified portfolio of DST offerings may add another layer of protection onto your equity in the event of a market downturn, they can also potentially increase your return by providing access to other asset classes or marketplaces which may be experiencing better performance.

At Corcapa 1031 Advisors, we provide guidance and help investors find the best 1031 DST replacement property to complete a successful tax-deferred exchange. Contact us and a 1031 Exchange specialist can review and help build your real estate portfolio. – (949) 722-1031.

Securities offered through DAI Securities, LLC, Member FINRA/SIPC