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Investors Looking for Replacement Solutions – By Don Meredith

Posted on 01. Jul, 2013 by in all

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An investor at one of my recent seminars asked several important and pertinent questions, the answers to which I’d like to focus on in this article.

Question: You’re a financial advisor, why so much focus in real estate?

Answer: I became interested in the cash flow not related to the stock market that commercial property offered our investors. In the late 90’s REIT’s (real-estate investment trusts) became my area of expertise. In 2002 the IRS changed the “like kind exchange” definition thus the “larger managed replacement properties,” was off and running. The industry expanded the offerings at that timetomeet investor demand. That space experienced exponential growth in 2003 thru 2007 during the boom.

Question: I have been buying income properties that have cash flow the last few years and now it’s becoming more challenging. I’ve also seen older property owners getting offers they would like to accept with few options as to where to bring that equity while keeping the tax deferral allowed by a 1031 exchange.

Answer: The landscape has changed and shifted. Recent appreciation especially in Southern California has now presented the investor with a problem. The owners are getting full price offers with few obvious choicestoreinvest their funds that make strategic sense. The dilemma is do you now take you new found equity and invest in property in the same geographic area? Is there a way to diversify geographically without feeling a loss of control? The Delaware Statutory Trust (DST) is a strong option; these are fully managed by professionals at the highest levels of management and oversight. DST often offers healthy monthly cash flow and the sponsors that have emerged are the leaders in the industry. As with many investments in he last 5 years the weakness has been completely flushed out and the strength has moved in.

Question: Are you feeling more optimistic about real estate investing and investing over all?

Answer:  It’s interesting if you take a look at the economy over all, the real estate market, and for that matter the stock market. Once again a lot of weakness has been replaced by strength and a lot of pessimism has been factored intotoday’s pricing of real estate and the stock market

Question: How can the stock market be so high in such a lack luster economy?

Answer: As Steve Forbes said recently,” It’s because companies have done a darn good job of becoming efficient over the last several years.” Real estate has become efficient as well, just take a look at all the cash transactions compared to the over leveraged risk in weak hands of the past,

Kathy Biewenga from Asset Preservation stated,” Apartment owners are getting offers right off the street with no where to go with their equity. Today’s DST’s are a good fit and a solution for many.” William Exeter, CEO of Exeter 1031 Exchange Services, LLC said, “ DST’s can be an excellent investment strategy for certain investors.  For example, accredited investors that can’t qualify for financing on their own can generally invest in a DST that already has the financing in place.  And, investors that don’t have sufficient equity capital coming out of the sale of their relinquished property to adequately diversify their real estate portfolio on their own can do so by acquiring multiple replacement properties through a DST investment.”

Question: Don I have always managed and controlled my own property, how does the DST solve some of the challenges associated with today’s economy and secure cash flow for retirement years?

Answer: DST’s have been gaining in popularity for several reasons not to mention the financing is built into the transaction, meaning the individual investor does not have to worry about going through the lengthy procedure required by lenders these days. The DST is a much improved evolution of the TIC structure by solving the challengers of lender requirements for issues such as refinancing and efficient decision making at the management level.

DST’s focus on small to medium- sized retail properties, net leased to high-credit quality tenants and multi-family residential properties with the most cost effective structure. This can represent an improved investment methodology than other current opportunities. I believe this can be accomplished by developing a DST with the lowest cost structure possible and investing in properties with efficient, low, ongoing expense requirements. If you add to this high-credit quality tenants on long-term leases and safe property financing, you can see why I believe we have something new and substantial for today’s conservative investor.”

As with any type of real estate investment, investors may be subject to high vacancy rates and loan defaults. DST’s are also not sole-ownership investments, it is a more passive investment made up of multiple owners and ultimately controlled by the sponsor. It is important for investors to consult with an experienced Delaware Statutory Trust professional, and to obtain competent legal and tax advice.

In closing, I would like to share a quote from the book “The Most Important Thing” by Howard Marks. “Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.”

The new leaders in real estate are now emerging.  It’s time to be alert and shake off the events of the last four or five years.  Allow yourself to evolve by knowing what your options are.  It’s time to be proactive and put your energy and investments to work!
Don Meredith is President of L.T.I.  For more information, visit www.tacticalincomeforlife.com or call 619.726.6100.