Property Diversification

The DST marketplace is extensive and diverse, and with DST investment minimums typically set at $100,000, DST investors can practically diversify their real estate holdings into multiple properties among various asset classes, lease types, and geographies, opening the opportunity for a more balanced allocation of exchange proceeds aligned with their income needs, long-term objectives, and risk tolerance. Spreading an investment across multiple properties may help reduce exposure to the performance of any single asset or tenant.

Asset Class and Lease Type Diversification

A range of asset classes are represented in the DST industry, including: multifamily, industrial, retail, senior housing, student housing, self-storage, and hospitality, among others. A substantial marketplace provides investors options across property and lease types to fit their investment objectives and risk tolerance. For example, investors seeking more stable income may elect to exchange into NNN assets with long-term leases and credit tenants who are responsible for insurance, taxes, and property maintenance, while investors seeking greater growth potential may choose shorter-term lease asset types, such as residential assets, self-storage, or hospitality which provide greater potential for NOI growth and asset appreciation having the ability to adjust rents to market. Some investors choose to hedge against the risks associated with any single asset class by dividing their exchange proceeds into distinct property types, bearing in mind the cyclical nature of the real estate market along with broader macroeconomic factors that may lead to variances in the performance of the various asset classes.

Geographic Diversification

A growing strategy among investors is to use DSTs as a means to diversify geographically, repositioning their real estate portfolios away from certain challenged markets with increased political risk, dramatic insurance market adjustments, and net negative demographic changes into less regulated and higher job and population growth markets. DSTs, as full-service, professionally managed real estate investments offer investors a means to access more desirable markets without needing to obtain the separate services and associated costs and risks of a third-party property manager.

Sponsor Diversification

Diversifying across DST sponsors can give investors access to several institutional asset managers, each with its own acquisition approach, operating expertise, and asset management strategy. Allocating exchange proceeds among offerings from different sponsors may help reduce reliance on any one firm’s management decisions and execution. Investors should evaluate each sponsor’s track record, asset class of focus, and business plan for managing the asset.

Structure Diversification

Investors can also diversify by exit strategy, allocating exchange proceeds between traditional DST programs designed to preserve the opportunity for another 1031 exchange upon sale and DST programs structured for a potential Section 721 UPREIT transaction. Traditional programs offer flexibility to select new replacement properties at exit, but require another exchange to continue tax deferral. A 721 UPREIT strategy may provide access to a broader, professionally managed real estate portfolio and potential future liquidity, subject to holding periods and redemption restrictions. However, once investors receive operating partnership units, those interests cannot be exchanged under Section 1031, and subsequent redemption or conversion into REIT shares generally triggers taxable gain. Combining the approaches can balance different long-term objectives, but investors should review each offering’s exit provisions, fees, and risks with their financial and tax advisors.