DST investments, also known as Delaware Statutory Trusts, have become an increasingly popular real estate investment vehicle in recent years. However, like all investments, DSTs also carry certain risks that need to be evaluated. This article takes an in-depth look at the pros and cons of dst investments, examining the risks as well as the potential rewards for investors. Key factors such as liquidity, diversification, management fees, and inherent real estate risks are analyzed to provide a comprehensive view on whether dst investments can be considered safe for investors.
Liquidity is a major risk factor for dst investments
One of the biggest risks of dst investments is their illiquidity. Unlike stocks or bonds, dsts cannot be readily sold on the open market. Investors are usually required to hold their dst investment until the end of the statutory trust period, which can range from 7-10 years. Trying to exit early often incurs large penalties. The lack of liquidity makes dsts risky for investors who may need access to their capital before the trust period ends. It limits the ability to rebalance investments or withdraw funds in response to changing life circumstances.
Diversification helps mitigate risks of individual property downturns
Dst investments can provide strong diversification benefits that help reduce risk compared to owning a single property directly. Most dst offerings consist of large real estate portfolios spanning multiple geographic regions, property types, and tenants. If one property within the dst portfolio suffers decreased occupancy or rent collections, the overall trust is less impacted due to revenue from other properties. However, dsts focused on narrow niches like self-storage or student housing offer less true diversification.
Management fees eat into investor returns
Typical dst investments incur asset management fees ranging from 1-3% of the property value per year. These fees go to the trust sponsors and managers to oversee the real estate assets. The fees come directly out of distributions that would otherwise go to investors. Over the full 7-10 year lifespan of a dst, management fees can accumulate to significant sums and hamper overall returns.
DSTs carry inherent real estate investment risks
While offering diversification, dsts are still subject to broader real estate market conditions. Loss of tenants, decrease in occupancy rates, natural disasters, and deterioration of properties over time can all negatively impact dst investment performance. Location also matters, regional economic declines affect demand. Being non-managed, investors have little recourse to impact operations.
In summary, dst investments do carry meaningful risks that investors must weigh carefully before committing capital. Illiquidity, high management fees, and lack of operational control can hinder returns, but downsides can be mitigated through portfolio diversification. Overall, dsts merit consideration within a broader real estate allocation for qualified investors.