Additional Benefits of DTS: Invest in Real Estate debt-free

Introduction

Investing in real estate can be a rewarding venture, offering opportunities for long-term wealth accumulation and financial security. However, like any investment, real estate carries its own set of risks, including credit risk. Credit risk in real estate refers to the potential financial loss that may arise from an inability to meet debt obligations, such as mortgage payments or property-related expenses. Minimizing exposure to credit risk is a crucial aspect of successful real estate investment, and one effective strategy is to reduce debt. 

On September 7, 2023, Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the 30-year fixed-rate mortgage (FRM) averaged 7.12 percent. “For the fourth consecutive week, the 30-year fixed-rate mortgage hovered above seven percent,” said Sam Khater, Freddie Mac’s Chief Economist. “The economy remains buoyant, which is encouraging for consumers. Though while inflation has decelerated, firmer economic data have put upward pressure on mortgage rates which, in the face of affordability challenges, are straining potential homebuyers.”

How Delaware Stautory Trusts Help Eliminate Debt

While taking on some debt is often necessary to invest in real estate, it’s essential to do so wisely. Assess your financial situation and consider your ability to make monthly payments comfortably. Avoid over-leveraging, which can increase your credit risk significantly.

When you invest in a DST, you are purchasing a fractional ownership interest in the property held by the trust. Since there are multiple investors, the debt is collectively distributed among them, which results in a reduced individual debt burden. DSTs usually acquire properties through non-recourse loans, meaning that the lender’s recourse is limited to the property itself. This protects investors from personal liability and ensures that their other assets are shielded from any potential debt arising from the trust’s property. 

DSTs often invest in institutional-quality properties such as commercial real estate, storage units, retirement communities, apartment complexes, or retail centers. These properties tend to have stable cash flows, making them more resilient to market fluctuations and economic downturns. This stability can contribute to consistent income, which in turn can be directed towards debt reduction.

A DST is managed by a professional trustee or a management company, which assumes the responsibility of handling the property’s day-to-day operations, including debt servicing. This relieves investors of the burden of managing the property and its associated debts themselves. By pooling funds with other investors, DSTs provide access to larger and potentially more lucrative real estate opportunities that may not be attainable individually. Diversification across multiple properties and markets can help reduce the risk associated with a single property investment, minimizing the impact of potential debt-related challenges.

Lower debt levels reduce your financial risk and make you more resilient to economic downturns or unexpected interest rate increases. The additional financial flexibility provided by lower debt loads can improve credit and increase future purchasing power for future investments. Ultimately, the greatest benefit that the DST structure provides may be the feeling of greater financial security that comes with more certainty about your financial future.  

Conclusion

Delaware Statutory Trusts offer real estate investors a valuable tool for eliminating debt while enjoying the tax advantages of a 1031 exchange. By leveraging shared ownership, non-recourse loans, and professional management, investors can reduce their individual debt burden and diversify their real estate portfolios. However, it’s essential to understand the legal and financial implications and seek advice from qualified professionals before integrating DSTs into your investment strategy. With proper planning and execution, DSTs can be an effective means to achieve financial stability and success in the world of real estate investing.

Voss Real Estate Advisors

September 29, 2023

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