A Delaware statutory trust is a type of business trust that allows investors to go in together to buy a piece of investment property. It can provide a true source of passive income, because investors don’t have to deal with maintaining the rental property, finding tenants, making repairs, and all that stuff that can make owning an investment property such a headache, and it can allow investors to gain access to real estate investment at a level that might otherwise be beyond their current means.
Is a Delaware statutory trust the right choice for you? It could be a great choice if you want to diversify your holdings, perform a 1031 exchange, or earn passive income. You’ll have access to institutional-quality assets, and there’s limited personal liability at the investor level.
Let’s take a look at the pros and cons of Delaware statutory trusts:
Pro: You Can Easily Make a 1031 Exchange
Delaware statutory trusts are very popular among real estate investors who want to shelter their earnings from capital gains taxes by performing a 1031 exchange. In a 1031 exchange, you can sell a piece of investment real estate and effectively swap it for another piece of investment property by having a qualified intermediary hold the proceeds on your behalf and facilitate both the sale of your old property and the purchase of your new property.
However, you have to perform the exchange of properties on a deadline in order to reap the tax-deferral benefits. You have 45 days from the sale of your old investment property to identify three replacement properties, and then only 180 days to close the purchase of the replacement property. Because Delaware statutory trust offerings are often sold pre-packaged, it’s easy to get the timing right.
Con: Delaware Statutory Trusts Are Very Illiquid
Once you buy into a Delaware statutory trust, you’re more or less in it until the holding period is up, which will typically be five to 10 years. That’s fine if you can afford to have your capital tied up for years, and you’re more interested in the passive income stream than in having access to your capital. However, if you need access to your capital before the holding period is up, you should choose a shorter-term investment.
Pro: You Can Earn Passive Income
Income earned from a Delaware statutory trust is true passive income. You don’t need to do any landlord work, like maintaining properties, chasing down tenants for rent, or finding new tenants. You just sit back and collect a regular check. The managing sponsor will be responsible for making the decisions and while someone will be chasing tenants and maintaining properties, it won’t be you.
Con: Your Fund Cannot Raise New Capital
Once a Delaware statutory trust has closed to new offerings, it can’t raise new capital or accept new investors. That could be a problem if rental incomes drop due to decreases in occupancy, or if major repairs are needed to the property (new roof, anyone?). Expenditures of capital could mean lower returns for you.
Pro: You’re Sheltered from Personal Liability
However, when you invest in a Delaware statutory trust, you’re sheltered from much of the personal liability that can come with direct property ownership. The leadership structure of a Delaware statutory trust means that rogue investors are unlikely to be a problem. And, as far as lenders are concerned, the trust is the sole mortgage borrower, so you don’t need to qualify for a mortgage yourself, nor even get one, as long as you have enough money to cover the minimum investment.
Con: You Cannot Take Control of Your Investment
If you’re a hands-on investor who likes to take personal control of your real estate investments, a Delaware statutory trust may not be for you. No, the structure of a Delaware statutory trust means that a managing sponsor will be making all the day-to-day decisions regarding the asset as well as any operational decisions that can boost the value of the asset or increase investor returns. As an investor, you will have no say in any of that. Of course, that can be a plus if you’re looking to maximize returns and minimize stress.
A Delaware statutory trust can be an excellent investment vehicle if you want to perform a 1031 exchange, or just want to access a higher level of institutional real estate investment. You can earn passive income from your holdings, and never have to deal with a single tenant. It’s all the benefits of real estate investing, with none of the drawbacks, so diversify into real estate today with a Delaware statutory trust.