REITs, TICs, and DSTs are all different ways that you can invest- but what are they, how are they different from one another, and why might one be a good choice for your own investments? David Moore and Tina Colson cover these questions and more in this week’s video.
What You Will Learn in This Video
- What REITs, TICs, and DSTs are
- How REITs, TICs, and DSTs are used
- The benefits of an REIT, TIC, or DST
- Which method is right for your situation
Watch the video or read the full transcript below to learn which of these three methods may be the right choice for your next real estate investment.Read the Full Transcript
David Moore: Hi, David Moore with Equity Advantage, 1031exchange.com, and I’ve got Tina Colson from our firm here with me today. She’s going to be testing Tina, so you got some questions for me I understand.
Tina Colson: I’m testing David.
David Moore: Yes.
Tina Colson: I’d like to talk about REITs, TICs and DSTs. We can facilitate the purchase of these investments through our 1031 exchange. Can you talk briefly about the difference between each investment and why someone would choose this option over going out and purchasing a single family residence or multifamily?
David Moore: Sure, great question. Typically, we look at all three of those things as in games. The people that are, honestly right now during these times, we’ve got lots of people that are very tired of their politicians, very tired of tenants and everything else. I was going to say, typically, for my mom, she doesn’t want to deal with a tenant. She doesn’t want it to have to manage a property and deal with all the heartache that goes along with that.
At the end, if she sells one of those rental houses, she doesn’t want to have to pay the tax so where can she go and maintain the benefits of real estate ownership without having to deal with maybe the headaches of ownership, too; the terrible T’s: toilets, trash, tenants, turnover. Tina was one of those.
Tina Colson: I was just going to say: don’t add Tina in there.
David Moore: Exactly. The deal is, if you look at it at ways to buy an effect passive piece of real estate, and if we were talking from our IRA advantage perspective, we’d be talking about REITs, a Real Estate Investment Trust. A REIT, that’s sort of Wall Street’s solution to an investor with a retirement account who wants to go buy real estate; go buy that Real Estate Investment Trust.
That works fine for the Wall Street world, but if you want to go buy real estate with money out of your pocket, is that really what you want? It’s a stock, so it doesn’t really give you the benefits of ownership of a piece of property, the interest deduction, depreciation, all that stuff; where a DST, Delaware Statutory Trust or a Tenancy In Common Investment will.
David Moore: Furthermore, TICs and DSTs are easily exchanged into; REITS typically are not. There are exceptions called up-REITs, so you basically exchange an asset they want to absorb and you can get into it, which you can get into that thing, but after you’re in, there’s no way out. Typically, I’m not a fan of up-REITs. Everything’s got an opportunity, a place that is right, but typically I’m against those.
On the other hand, Tenancy In Common and DST, those are where most of our people go. During the last crash here, we are in the time of COVID, so we’re dealing with some real issues once again.
Tina Colson: Right.
David Moore: If we look back at the last crash, and we start looking at things that were sort of casualties of that, I would say that Tenancy In Common offerings, institutionalized Tenancy In Common offerings are sort of a casualty of that time. It wasn’t the structure that was a problem. I totally believed that it was not the structure involved. It was just the time and it was the sponsors doing things that, buying at the top of the market, marking them up and selling, and that’s what caused the problems. It’s not the ownership structure.
Tina Colson: Right.
David Moore: TICs have been around forever. Any joint ownership, historically, typically it’s going to be a TIC. In today’s world where I see TICs user value add situations, where you’re going, buying something, the sponsors buying something they want to fix and turn, it gives you the ability to do that stuff; where, typically, a DST is not going to be that. DST is going to be a going concern. A TIC is a single asset. DSTs can be a single asset or they could be a dozen different assets.
Tina Colson: Multiples.
David Moore: It really doesn’t matter. Once again, if you’re looking at making money through a value add type situation, you’re looking at a TIC vehicle. If you’re looking at just a great solid passive investment, the DST is going to be the bulk of that market. TICs got sort of a black eye the last crash. A lot of people say, “You don’t want to buy a TIC; they’re horrible.” Like I said, it’s not the structure; it’s those sponsors.
I would caution anybody today, anytime you’re working with somebody else, you’ve got to look at what you’re buying. The investment is only as good as the sponsor. You’ve got to make sure you’re working with somebody that’s going to be there after this fiasco is over.
Tina Colson: Right.
David Moore: Don’t just buy something based upon the return. So many times people just look at, “Gee, this guy is going to pay me eight or 10, and this one’s paying me six, five to six, I’m going to go for the eight or 10,” risk and reward, so you’ve got to look at this stuff. My advice is, if you’re going into any of these institutionalized investments, work with somebody that was there before the last crash.
They’ve been through it before, odds are they’re going to be through it again, and if it’s somebody that’s just getting into this thing, I would really take a diligent, deep dive on everything; make sure it’s good.
Tina Colson: Good. Also, I know with the DSTs that, because it could be one or multiple properties that are within that DST realm, is it true that you have to also file a tax return where that property is held, so not only if I’m living here in Oregon, and I buy a DST in Minnesota, I now need to file that return as well?
David Moore: For years, and it’s a great question because it brings up an issue that is very, very misunderstood, I think, and some of the time… Years ago we used to hear ads, “Start a Nevada limited liability company because there’s no state tax,” and everybody thinks, “Gee, I want to have it there because I’m not going to have to pay any, so I’ll do the LLC in Nevada and I’ll go buy in California and I get away from that.”
No, you don’t. It’s where the investment is, so you’re going to file a return anywhere you’ve got investment income. These things, if you’re looking at a DST, if it’s somebody that doesn’t really do a lot of that, they might put a DST together with 10 properties in 10 different States. It’s going to cost a little bit of money just to do the tax work.
Tina Colson: Yes.
David Moore: If you’re working with somebody that understands this stuff, the major sponsors, they’ve been around the block, they understand and, if they’re going to put multi-asset DST offering together, typically they’re going to try to do it and minimize the number of States that it’s going to overlap on. Yeah, that’s the thing, that’s one of those situations where, “Gee, if I live in Florida and I’ve got an investment in Cali, I don’t need to worry about it.” No, that’s where you’re making the money.
Tina Colson: Right, just more things to think about as we go through with our investments and to keep on the back of our mind. With that, also, I think about additional costs that we may incur moving forward. Is there anything else that folks would need to think about in that scenario?
David Moore: I think we have to go back once again to the last crash. Okay. Whoever you’re buying from or buying with, you’ve got, if you’re an owner of an asset, you have, obviously, you’re concerned about what you’re making, but you’ve got to look at that other side. What’s the flip side? What could potentially be a problem? Does that sponsor have the right to come back to you to save a property? That’s where the issues come up.
During the last crash, we did seek capital calls on some of the TIC offerings and different things were going. The biggest sponsors, the busiest ones, they pretty much got through everything without any issues along those lines, but you need to be careful. If you’re buying into some, understand what you’re on the hook for.
Most of the time, if we’re looking DST stuff, it’s all nonrecourse debt; you’ve got a problem with a property, the property went away for some reason, at least not going to destroy your credit.
David Moore: That’s where that last crash we did a lot of phantom gain exchanges. Phantom gain exchange for those of you out there would be a situation where people think they have to have a profit on property to have gain, and that’s totally untrue. Phantom gain is situation where if the debt exceeds the basis on a property, in a foreclosure short sale, the debt’s going to be treated as a sales price and you’re going to have gain even though you lost your property or sold it via short sale.
That’s one of those things, on a primary residence, you had tax relief on income properties you did, so it’s really important to understand where you’re sitting with those things.
David Moore: In those situations where we had to deal with those properties, at least it didn’t destroy the person’s credit, so they were able to… A situation where the Phantom gain, you lose the asset, you’re going to pay tax. The pleasure of losing a property, paying tax to lose it, or you come out of pocket roughly what you would have lost a tax to go complete an exchange and at least you didn’t lose all that and have to pay the tax. That’s a situation where I hope, I really hope we don’t get there this time, but it depends.
Yeah. If the banks open up, and the banks, how come they got a drop of how many basis points and yet their borrowing rates increased? It’s ridiculous.
Tina Colson: That’s right.
David Moore: Yeah, we hope we don’t get to that place. My advice, passive investments. These things, a lot of times people say, “You’re giving your money to somebody else to manage,” but if you’re dealing with one of these major sponsors that’s been doing this for 20 years, 30 years-
Tina Colson: They have the knowledge.
David Moore: Yeah, they have the knowledge, they’ve got the pockets to deal with it, and my advice is just talk to the sponsors you’re looking to work with and see how they addressed the last crash and see what’s going on this time and how they’re doing.
Tina Colson: Perfect. Thank you so much for answering the questions.
David Moore: Sure.
Tina Colson: Again, thank you for watching our video: David Moore, Tina Colson, Equity Advantage, 1031exchange.com. Again, free consultations. Call us up, ask us, and we’re happy to help you out with any questions that you may have. Thank you so much for joining us today.
David Moore: Thank you, bye bye.
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