Passive Income Through Private Real Estate

Evaluating DSTs for Client Portfolios

For registered investment advisors (RIAs), recommending real estate investments to clients often involves balancing potential returns with ease of management. Passive real estate investment vehicles like Delaware Statutory Trusts (DSTs) have gained popularity among investors seeking consistent income streams and portfolio diversification. However, as with any investment strategy, it’s critical to assess the merits and limitations to determine whether DSTs are suitable for your clients.

In this blog, we’ll explore the key benefits and potential drawbacks of passive real estate investments through DSTs, equipping RIAs with insights to guide their clients more effectively.

What Are DSTs?

A Delaware Statutory Trust (DST) is a legal entity used to hold title to real estate assets. It allows investors to purchase fractional ownership in professionally managed properties. DSTs are particularly common in 1031 exchange scenarios, enabling investors to defer capital gains taxes on the sale of appreciated property while transitioning into “like-kind”  income-generating replacement real estate.

For clients looking to step back from active property management or diversify their portfolios, DSTs offer a hands-off approach to real estate investing.

Key Benefits of Passive Real Estate Investments for Your Clients

Potential for Steady Income Streams
DSTs are designed to generate passive income, typically through monthly or quarterly distributions. The trust’s income stems from leases on the underlying real estate, often backed by long-term agreements with creditworthy tenants. 

This predictable cash flow can appeal to clients nearing or in retirement who prioritize stable income over capital appreciation.

Example Use Case: A retiree sells a rental property and reinvests the proceeds in a DST, securing a consistent income without the stress of managing tenants or maintaining the property.

Diversification Opportunities
Real estate is a well-recognized diversification tool, offering low correlation with traditional assets like stocks and bonds. DSTs take this a step further by allowing fractional ownership across multiple property types, such as multifamily housing, industrial facilities, and office spaces. Diversification within the real estate sector can help mitigate risk, particularly in volatile market conditions.

For RIAs: DSTs enable clients to access institutional-grade real estate opportunities typically out of reach for individual investors.

Tax Efficiency with 1031 Exchanges
One of the most compelling benefits of DSTs is their eligibility for 1031 exchanges. Clients can defer capital gains taxes by reinvesting proceeds from a sold property into a DST. This strategy not only preserves more capital for reinvestment but also simplifies compliance with IRS guidelines.

Important Note: DSTs are particularly advantageous for clients transitioning from active management to passive investment, as they provide a clear exit strategy without immediate tax burdens.

Hands-Off Management
Unlike direct property ownership, DST investors do not bear the responsibilities of day-to-day property management. Professional asset managers handle everything from tenant relations to property maintenance, allowing clients to focus on other priorities.

For RIAs working with time-constrained or retirement-focused clients, DSTs' turnkey nature can be a strong selling point.

Potential Limitations of DSTs to Consider

While DSTs offer significant benefits, they aren’t without limitations. RIAs must evaluate these considerations to ensure they align with clients’ financial goals.

Illiquidity
DST investments are typically illiquid, with holding periods ranging from 5 to 10 years or more. Clients must be comfortable with a long-term commitment and the inability to access their capital during the trust’s lifecycle.

Market and Tenant Risk
While DSTs diversify income sources, they remain subject to real estate market dynamics. Vacancy rates, lease expirations, or tenant defaults can impact income stability, particularly during economic downturns.

Limited Control
DST investors have no operational control over the trust’s properties. While this is a benefit for those seeking passive income, it may be a drawback for clients accustomed to influencing investment decisions.

Is a DST Right for Your Clients?

As with any investment vehicle, the suitability of a DST depends on individual client goals, risk tolerance, and financial situation. RIAs should weigh the benefits of passive income, diversification, and tax efficiency against the constraints of illiquidity and reduced control.

DSTs may be particularly appealing to:

• 1) Retirees seeking stable, hands-off income.
• 2) Investors transitioning out of active real estate management.
• 3) Clients looking to defer capital gains taxes through 1031 exchanges.

Why Partner with CAI Investments?

CAI Investments has over a dozen years of experience in private real estate offerings, including DSTs. Our approach prioritizes transparency, risk management, and delivering high-quality investment opportunities tailored to client needs. From due diligence to ongoing asset management, we’re committed to helping RIAs provide unparalleled value to their clients.

Want to explore how DSTs can enhance your clients’ portfolios? Schedule a consultation with CAI Investments today.