Investing in a Delaware Statutory Trust (DST) offers a streamlined alternative to direct real estate investment, eliminating the need for property rehabilitation, closing costs, and complex cost-basis calculations. This simplicity extends to calculating the rate of return (RoR) on a DST. In this guide, we explore the key elements involved in determining the RoR for a DST investment.
Property Type and Rate of Return
The type of properties within a DST significantly influences the potential RoR. Generally, a DST’s annual projected RoR ranges from 4% to 9%, with the total RoR potentially exceeding these figures based on property appreciation. Lower-risk properties, such as multifamily housing, typically yield lower returns, whereas higher-risk properties, like retail and industrial assets, offer higher expected returns. However, several factors, including location, market conditions, local regulations, and interest rates, also play crucial roles in determining returns.Key Components of DST Rate of Return
To calculate the RoR for a DST, investors must consider two primary components: the annual rate of return (cash on cash or CoC return) and appreciation realized at the terminal event (property sale).- Annual Rate of Return (CoC)
- DSTs aim to provide regular monthly distributions. For instance, a $500,000 investment in a DST with a 5.5% annual distribution rate projects an annual return of $27,500. This CoC return is calculated based on the initial cash investment and the annual cash distributions received.
- Appreciation
- DST investments are not indefinite and typically have a lifespan of 5-10 years. Upon the sale of the property, any appreciation in value contributes to the total return. For example, if a property appreciates by 20% over five years, the principal investment increases proportionately.
Calculating Total Return
The total return includes both the CoC return and the property appreciation. For example:- Initial Investment: $500,000
- Annual CoC Return: $27,500
- Total CoC Return over 5 Years: $27,500 x 5 = $137,500
- Property Appreciation: $100,000 (20% of $500,000)
Accounting for Fees
Investors must also factor in fees, such as disposition fees and closing costs. For instance, assuming a 3% disposition fee and 1.5% closing costs on a $600,000 sale price:- Total Fees: $600,000 x (3% + 1.5%) = $27,000
- Net Total Return: $210,500 ($237,500 – $27,000)
- Net Total Return Percentage: $210,500 / $500,000 = 42.1%
Understanding Yield vs. Rate of Return
It is crucial to differentiate between yield and RoR. Yield refers to the rate of return from cash distributions during the holding period, while RoR encompasses the total return, including interest, capital gains, dividends, and realized distributions at the terminal event.Conclusion
Calculating the RoR for a DST investment is essential for making informed decisions and accurately projecting potential returns. DSTs offer numerous advantages over direct real estate investments, particularly for investors seeking passive income and simplified ownership structures. These benefits, combined with the tax advantages of a 1031 exchange, make DSTs a compelling option for many investors. For personalized advice, we recommend consulting with your financial team or tax advisor to determine if a DST aligns with your investment goals. For further assistance and expert guidance on DST investments, contact us at Investment.org. Our seasoned professionals are here to help you navigate the complexities of 1031 exchanges and maximize your investment potential.Request Expert Guidance on Your 1031 Exchange Investments
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