Use The Delaware Statutory Trust (DST) to Mitigate Real Estate Risks

DST in Action - Elevating Safety in Real Estate Investments

Introduction

Real estate has long been considered a relatively stable and reliable investment. However, it is not immune to unforeseen circumstances that can lead to substantial declines in property values. To safeguard real estate investments against extreme market shocks and economic uncertainties, investors should consider risk mitigation strategies such as the DST.

DST as Risk Mitigator

The following is a description of the various types of risks inherent in real estate investing and how the DST can help mitigate those risks.

Market Risk:  This encompasses changes in the overall real estate market due to economic cycles, interest rates, and general market demand. Market risk can affect property values, rental income, and the ease of selling the property.

The DST is a trust with a finite life that lessens the risk to long term market cycles.

Liquidity Risk: Real estate investments are not as liquid as other types of investments like stocks or bonds. Selling a property can take time, and the process can be uncertain and lengthy, which can be a risk if you need to access funds quickly.

The DST is a security and can be sold incrementally much like shares of Apple or Amazon.

Credit Risk: This involves the risk of tenants not paying their rent on time or at all, which can affect your cash flow. In commercial real estate, the financial health of businesses renting your property also poses a credit risk.

The DST finds high quality tenants often with leases agreements spanning the life of the DST.

Legal and Regulatory Risk: Real estate is subject to a wide range of laws and regulations, including zoning laws, environmental regulations, and landlord-tenant laws. Changes in these regulations or failure to comply can lead to legal challenges and financial losses.

DST are generally formed in areas with favorable tax and regulatory environments.

Geographical Risk: The location of your property can significantly impact its value and rental potential. Economic downturns, changes in local industry, or natural disasters in a specific area can negatively affect your investment.

DSTs avoid locations prone to extreme valuation fluctuations.

Interest Rate Risk: Fluctuations in interest rates can affect both the cost of borrowing money for real estate purchases and the value of your property. Rising interest rates can lead to higher mortgage payments and decreased demand for property, lowering values.

The DST promoters work with large institutional financial institutions to mitigate interest rate risk on any debt used in financing the DST.

Management Risk: This involves the risks associated with property management, whether you manage the property yourself or hire a property manager. Poor management can lead to higher maintenance costs, tenant turnover, and reduced income.

DSTs typically have experienced management teams in place to oversee its properties.

Environmental Risk: Environmental factors such as contamination, natural disasters, and climate change can pose risks to real estate investments, affecting the property’s value, insurability, and attractiveness to tenants or buyers.

DSTs generally avoid areas prone to environmental issues such as fires and floods.

Inflation Risk: Inflation can erode the real value of rental income and affect the cost of property maintenance and repairs.

DSTS usually require fewer costs, such as deferred maintenance, that are impacted by inflation.

Lease Expiry Risk: In commercial real estate, the risk of leases expiring without renewal can lead to periods of vacancy, impacting income and cash flow.

The DST usually has a lease in place from inception and for the duration of the trust.

Conclusion

While real estate remains an attractive investment option, it is not immune to extreme market events. Being proactive and adjusting your investment strategy when necessary is key to mitigating risk. By diversifying your portfolio using DSTs, you can better protect your real estate assets and potentially improve your long-term returns.

Navigate the challenges and risks of real estate investments with the exceptional capabilities of Delaware Statutory Trusts (DSTs). Market risk, liquidity risk, credit risk — you name it, DSTs offer unparalleled solutions to secure your real estate investment portfolio. Learn more about leveraging the strategic power of DSTs.

Voss Real Estate Advisors

November 22, 2023

DST

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