Real estate investing can be quite lucrative. But it also comes with inherent risks like vacancies, lack of liquidity and hidden structural issues that can impact your return on your investment. Combine these risks with the responsibilities often called the “three Ts”—tenants, taxes and toilets—and it’s a time-consuming effort some would rather avoid. If you’re seeking a safer, more hands-off approach to your real estate portfolio, you might consider a Delaware Statutory Trust (or DST).

A DST is an investment vehicle organized as a trust that generates passive income from diversified real estate. Once you make an initial contribution (generally in excess of $100,000), you’re granted a fraction of interest in a portfolio of properties that generate a stable (if not guaranteed) annual return. This return is passive income for you and requires minimal maintenance over the usual holding period of 5-10 years.

These characteristics make DSTs a great—and relatively low-maintenance—way to generate a steady return of passive income over time. They can also be used to defer the taxable gain on the sale of property. That said, there are three things you should know if you’re considering a DST for your portfolio.

The Sponsor Does the Heavy Lifting

A sponsor runs the DST, bringing properties into the portfolio and subsequently seeking investors to acquire interest. The portfolio usually contains three to five diversified properties in the portfolio, from multi-family to commercial properties. They’re often located in varying demographics and locations across the country, which contributes to the stability of the investment.

Searching for, adding and maintaining these properties takes time and effort—and the sponsor handles it all. This makes a DST a desirable choice for real estate investors who don’t want the hassle of being a landlord. It also appeals to investors curtailing their workload to prepare for retirement or simply pursuing investing as a side gig.

Sponsor-Run Means Sponsor-Controlled

Because the DST is run by a sponsor, it greatly reduces your effort in maintaining the portfolio. However, ceding control comes with a price. In addition to charging fees on the annual return for maintaining the portfolio, the sponsor firm has complete control of the investment. This can be a deal-breaker for a real estate professional who wants to maintain control of the investments. You are at the mercy of the sponsor firm’s management of the properties and investment decision making.

As a result, one of the most important considerations in investing in a DST is getting comfortable with the sponsor. Some have been around for decades and can demonstrate continued success in an economic downturn and across a wide range of investment conditions. Finding such a sponsor can bring peace of mind knowing your funds are in good hands.

DSTs are Eligible for Like-Kind Exchanges

Current tax law makes DSTs a popular investment option for real estate investors selling appreciated property because DSTs qualify for 1031 exchanges. The proceeds can be held by a qualified intermediary under the usual rules governing like-kind exchanges. Then, within defined 1031 timeframes, all or a portion of the proceeds can be rolled into a DST to defer the gain realized on the sale of the rental property. Barring a significant change in law, the sales proceeds can be rolled into DSTs perpetually. The related gain will not be recognized until the 1031 exchanges cease and the proceeds are pulled from the investments.

For several reasons, a DST can be an appealing investment option. If you’re considering this route, reach out to a real estate CPA well versed in these and other opportunities.

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