Delaware statutory trusts are having a moment – they’re seeing increased popularity lately because of how easy they are to buy and sell as part of a 1031 exchange. But is a Delaware statutory trust a good investment?
It’s a great investment if you want to earn passive income without all the responsibilities of owning property directly and renting it out yourself. But Delaware statutory trusts do have their drawbacks. You should make sure you can afford to have your capital tied up for three to 10 years before you invest in one. You won’t have any control over how the property is managed or maintained. And, as with any investment, you can see a dip in returns or even lose money.
But, for many investors, the benefits of investing in a Delaware statutory trust far outweigh the drawbacks. They’re very hands-off, which appeals to a certain kind of investor. You can realize the tax benefits of owning property without all the responsibilities. You’ll have access to institutional investment properties, and you’ll be sheltered from personal liability for the property. Let’s take a look at what Delaware statutory trusts can do for you.
Benefits of Delaware Statutory Trusts
For many investors, the primary benefit of buying into a Delaware statutory trust is that they’re perfect for 1031 exchanges. In a 1031 exchange, you sell a piece of investment property, but instead of taking the proceeds and having to pay capital gains taxes on them, you can roll over those proceeds into the purchase of another piece of investment property. That way, you can reinvest your gains and continue building your wealth for your future or even for the next generation. A qualified intermediary can help you make it happen.
The reason Delaware statutory trusts are such a popular choice for 1031 exchange investors is that they’re typically sold in packages and it’s usually easy to find a suitable one quickly. That’s important because you need to act fast to make a 1031 exchange happen – you only have 45 days from the day you close on the sale of your initial property to identify replacement properties, and then only 180 days from then to close on the purchase of the replacement property. If you’re looking to continue reaping the benefits of real estate investing but you’re getting tired of being a landlord, a Delaware statutory trust could be the perfect choice.
Even if you’re not doing a 1031 exchange, though, Delaware statutory trusts can be a great way to earn passive income. When you buy into a Delaware statutory trust, you’re buying a fraction of ownership of, typically, an institutional property – for example, a large apartment building, a commercial property, a self-storage facility, or a parking garage. You’ll receive regular payments that represent your share of the profits earned by the property, and you’ll also realize gains due to appreciation of the property over the course of the holding period.
You’ll get all the tax benefits of owning investment real estate, including tax deductions for depreciation, operating expenses, and mortgage payments. But you’ll be sheltered personally from liability – the trust will be the mortgage holder, and there will be no need for you to seek an individual guarantee.
Drawbacks of Delaware Statutory Trusts
The primary drawback of a Delaware statutory trust is that it can tie up your capital for quite some time. Once you put your money into the trust, it’s very difficult to get it back out again before the holding period has expired, so if you’re going to need access to that capital within the next three to 10 years, you shouldn’t put it into a Delaware statutory trust.
You should also know that, once offerings have closed for a Delaware statutory trust, it can’t accept new investors. This means it can’t raise new capital, so if the property needs major repairs or renovations, or rents go down or occupancy rates drop, you could see a decrease in your returns or even lose money.
You also won’t be able to have any control over the asset you partially own. The managing sponsor will make all the daily decisions regarding the maintenance and management of the property. If you want to use your experience to make changes to a property that will increase its investment returns, you’re better off owning property directly.
A Delaware statutory trust can be a great investment if you want to earn passive income from rental properties without all the hassle of dealing with tenants. If you can afford a rental property, you can probably afford to buy into a Delaware statutory trust. You’ll be glad you did, especially when the checks start rolling in.