A common question that investors ask is “what are the sales costs associated with investing in DSTs as compared to traditional real estate?”
Selling costs for DSTs (sometimes called “load”) are expressed as a percentage of the total cash or equity that is invested and range from 8% to 12% on average. Selling costs for traditional income properties are expressed as a percentage of the total value of the property including both equity and debt generally varies from 3% to 6% for commissions plus approximately 1% for other sales costs including title insurance, legal, taxes, etc.
If you are purchasing a traditional income property valued at $2 million, your total sales costs may range up to 7% (6% commission plus 1% other costs) or $140,000. By comparison, if you are investing in $2 million of DST interests that have a 50% loan-to-value, you will need to invest $1 million in cash to acquire those assets. Comparable sales costs may range up to 12% of cash or equity that you invest for a total of $120,000 (12% x $1,000,000). This example is offered to point out that total sales costs of DSTs can be comparable to the sales costs of traditional real estate investments. Sales costs can obviously vary based on many factors and there are cases where the acquisition costs of DSTs can be higher than traditional real estate and vice versa.
It is important to keep in mind that all quoted DST returns are based on the full amount of cash invested. If you invest $1,000,000 to acquire DST interests and the first-year returns are targeted at 5%, you can expect to receive $50,000 of income, net of all costs.
As with all real estate, it is important to understand that investment properties must generally be held for a period to earn back related sales expenses associated with the acquisition. Per our previous example, if $2 million of DST interests are purchased with $1 million in equity and targeted annual returns are 5%, the investor will receive $50,000 per year paid monthly. It will therefore take up to 2-3 years to break even on the up-front sales costs – less if appreciation and loan amortization are applicable. For traditional real estate, net cash returns are often less than 5% (e.g., 2% or less in California), and the breakeven on sales costs could be somewhat longer.
While there are tangible costs associated with purchasing DST interests, overall costs can be comparable to traditional real estate. With a DST however, the investor is receiving added benefits including hassle-free income, attractive cash flow, and is relieved of loan responsibilities that may be required for investments in traditional real estate.
Each DST offering is accompanied with detailed documentation that spells out all associated costs. When investigating specific DST offerings, you should seek inputs from a knowledgeable securities representative, preferably someone with significant real estate experience, to determine the actual selling costs as well as comparisons to other investment options that you may be considering.
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor. Member of LightPath Capital, Inc.