Are DSTs A Good Investment? | Know The Tradeoffs

DSTs can fit when you want passive real estate income and 1031 tax deferral, but fees, illiquidity, and sponsor quality can swing results.

If you own investment property, you already know the two big headaches: the work and the tax bill when you sell. Delaware Statutory Trusts (DSTs) sit right in the middle of those problems. They can turn an active, hands-on property into a fractional stake in professionally run real estate, often inside a 1031 exchange.

Still, “hands-off” doesn’t mean “risk-free.” DSTs are packaged deals with their own rule set, fee layers, and limited exit options. A DST can be a clean fit for the right investor at the right time, and a frustrating trap for someone who needs flexibility.

This article breaks down what DSTs are, where they shine, where they bite, and how to judge an offering without getting lost in marketing gloss.

What A DST Is In Plain English

A DST is a legal trust that holds title to real estate. Investors buy beneficial interests in the trust, not deeds to a specific unit. The sponsor (the firm that sets up the DST) selects the property, arranges financing, hires property managers, and runs the day-to-day. You get distributions if the property produces cash flow, plus a share of results when the property sells.

Most DSTs you’ll see in real estate exchanges hold stabilized, income-producing assets: multifamily, industrial, medical office, self-storage, or net-leased retail. Some hold multiple properties. Many use moderate debt, and some use none. Terms vary, so you have to read each deal on its own.

Are DSTs A Good Investment?

A DST can be a good investment when three things line up: you want passive ownership, you can stay invested for years, and the sponsor’s underwriting and fee structure hold up under scrutiny. DSTs often attract owners who are done fixing toilets, tired of vacancy swings, or ready to spread one big sale into several smaller real estate positions.

A DST can be a poor fit when you need control, quick access to capital, or the ability to refinance, renovate, or reposition the property midstream. DST rules keep the trust “hands-off” in ways that can block common real estate moves. That’s the trade: less work and less control.

How DSTs Plug Into 1031 Exchanges

Many investors first hear about DSTs when they sell a rental and want to defer capital gains under Section 1031. The IRS lays out core requirements and timing basics for like-kind exchanges, including the role of a qualified intermediary and the need to swap investment real estate for qualifying replacement property. See the IRS overview on like-kind exchanges and real estate tax tips for the baseline rules.

Why DSTs show up in this lane: they can be purchased in fractional amounts, which helps when your sale proceeds don’t match the price of a single replacement property. You can also split money across multiple DSTs to spread tenant and market risk.

On the tax classification side, the IRS issued guidance that many in the industry rely on when treating certain DST interests as replacement property in a 1031 exchange. If you want to see the primary document that shaped common DST structures, read IRS Revenue Ruling 2004-86.

What You Give Up With A DST

With direct ownership, you can change rents, refinance, remodel, sell when you feel like it, or swap property managers. DSTs place tight limits on those moves. Many limits come from how DSTs are structured to stay compatible with common exchange treatment and the trust’s governing rules.

That “no tinkering” feature can be a relief if you want a calmer life. It can also be a problem if interest rates drop and refinancing would lift cash flow, or if the property needs fresh capital to stay competitive. In a DST, those levers may be unavailable, delayed, or handled only within narrow bounds.

Where DSTs Tend To Fit Best

Here are common situations where DSTs can earn their place:

• You’re exiting active management. You want real estate exposure without tenant calls and vendor drama.
• You need a clean 1031 landing spot. Fractional sizing can help match exchange proceeds without overbuying.
• You want built-in diversification. Splitting one sale into several DSTs can reduce single-property risk.
• You prefer institutional operations. A strong sponsor can bring scale in leasing, financing, and asset oversight.

Even in these cases, the offering still needs to earn a “yes.” Sponsor discipline, debt terms, tenant mix, and fee drag can make two DSTs with the same property type feel worlds apart.

Deal Risks That Matter More Than The Marketing Deck

DST offerings often come as private placements. That changes the information flow and the exit path. Private placements can involve limited public reporting and limited resale options. If you haven’t bought private placements before, the SEC’s plain-language bulletin is worth reading: Private Placements under Regulation D.

Here are the risk buckets that deserve real attention:

• Illiquidity. Many DSTs have no active secondary market. Expect a multi-year hold, often 5–10 years, sometimes longer.
• Fee layering. Fees can show up at purchase, during operations, and at sale. Small-looking percentages add up over time.
• Debt terms. If a DST uses financing, rate resets, maturity timing, and covenants can steer outcomes.
• Tenant and lease risk. A single big tenant can be a gift until it isn’t. Lease rollover schedules matter.
• Sponsor execution. Asset management quality can lift or sink a “good” property.
• Timing risk. If you buy at a peak cap rate cycle, your exit may land in a colder market.

Also watch how the deal is sold. FINRA has repeatedly reminded member firms about duties around private placements, including due diligence and clear risk disclosure. The plain source for that point is FINRA Regulatory Notice 23-08.

Due Diligence Checklist Before You Commit Cash

A DST isn’t something to buy on vibes. You want documents, numbers, and clear answers. Start with the private placement memorandum (PPM) and the property-level rent roll and financials. Then pressure-test the deal using a short set of questions that force clarity.

Below is a practical checklist you can run on any DST offering.

Decision Point	What To Ask Or Verify	What A Solid Answer Looks Like
Sponsor Track Record	Full-cycle history, not just launches	Prior deals with realized exits, not just projections
Fee Stack	Upfront, ongoing, financing-related, and sale fees	Clear schedule with totals you can model
Debt Structure	Rate type, maturity, covenants, reserves	Terms that match the hold plan and leave room for stress
Tenant Strength	Top tenants, lease term, renewal history	Diverse rent sources or durable credit tenants with long leases
Rollover Timeline	Lease expirations by year	No cliff where a large share expires at once
Distribution Policy	Is the payout covered by cash flow?	Distributions tied to net operating income, not fund returns
Exit Plan	Target hold period and sale triggers	Defined plan plus flexibility if markets shift
Property Condition	Recent inspections, capex plan, reserves	Visible plan for roofs, parking, HVAC, and deferred maintenance
Market Basics	Supply pipeline, rent growth, vacancy trend	Demand drivers that support occupancy even in soft years

How To Think About Returns Without Falling For A Single Number

DST marketing often leads with a distribution rate. Treat that as a starting point, not the whole story. You care about total return: cash flow plus what you might receive when the property sells, minus all fees and debt costs.

A few grounded ways to keep return expectations sane:

• Match the payout to property cash flow. Ask whether distributions are expected to be supported by net operating income after reserves.
• Model a flat exit price. If a deal only works when the property sells for more, the margin of safety is thin.
• Stress interest rates. Even fixed debt can hit at refinance or maturity if the hold period shifts.
• Focus on downside control. A stable tenant base and realistic leverage often beat rosy rent growth slides.

If you’re entering a DST through a 1031 exchange, taxes are part of the equation too. Deferral can be valuable, yet it shouldn’t be the lone reason to accept weak terms or heavy fee drag.

Hidden Fit Issues That Catch Investors Off Guard

DSTs can surprise people in a few predictable ways:

• You can’t “force” a sale. If you need liquidity for a business, a home purchase, or family needs, a DST may not cooperate.
• Control is limited by design. Even when a sponsor is competent, investors usually can’t steer leasing, refinancing, or renovations.
• Paperwork and timing matter. For 1031 buyers, missing deadlines or mismatching amounts can create taxable leftovers.
• Concentration can sneak back in. One DST tied to one asset and one tenant can behave like a single-property bet.

The fix is plain: set your rules before you shop. If you need access to your principal in under five years, treat most DSTs as “no.” If you can stay invested longer, the conversation becomes about deal quality.

DSTs Versus Other Common Routes

DSTs are not the only “less work” path after you sell. You can also buy another property and hire a manager, use tenant-in-common (TIC) structures, or shift into REIT exposure in a taxable account. Each path trades control, taxes, and liquidity in a different mix.

This table gives a simple, side-by-side view of the differences that tend to matter in real life.

Option	Control And Workload	Liquidity And Exit
DST	Low workload, limited control	Often multi-year hold, limited resale paths
Direct Rental With Property Manager	Medium workload, high control	You choose sale timing, market-dependent liquidity
Tenant-In-Common (TIC)	More shared control, more coordination	Exit depends on co-owners and deal terms
Public REITs In A Brokerage Account	No property workload, no property control	Daily liquidity, price moves with markets
Private Real Estate Funds	Low workload, limited control	Often locked up for years, terms vary by fund

A Practical “Yes Or No” Filter You Can Use

If you want a fast filter that still respects the nuance, run these checkpoints:

• Time: Can you hold 5–10 years without needing this principal?
• Control: Are you fine handing decisions to a sponsor with limited investor levers?
• Fees: Do the total fees still leave you a return you’d accept in a bland market?
• Debt: Are the loan terms aligned with the business plan, with room for stress?
• Diversification: Will you split across multiple DSTs, or does one deal dominate your net worth?
• Paperwork: If this is a 1031 exchange, do you have a qualified intermediary and a timeline you can meet?

If you’re answering “no” on time and liquidity, a DST is usually the wrong tool. If you’re answering “yes” across the board, the next step is choosing a sponsor and property that can hold up when the market is boring, not just when it’s hot.

What To Ask Your Advisor Or Broker Before Signing

Many DSTs are sold through broker-dealers. That’s normal for private placements, and it’s also a reason to ask direct questions about incentives and suitability. Keep it simple and specific:

• What is the full compensation tied to this offering, including selling commissions and dealer-manager fees?
• What happens if the property underperforms for two years?
• What are the exit routes: sale, refinance, 721 option, or other paths in the documents?
• What are the top three risks in the PPM, and what would make each risk show up?

You’re not being difficult. You’re treating a long-term, illiquid security like a long-term, illiquid security. That posture alone filters out plenty of bad fits.

Final Takeaway

DSTs can be a sensible way to stay in real estate while stepping away from active ownership, and they can help solve awkward 1031 exchange sizing issues. The same features that make DSTs convenient can also make them rigid. The best outcomes tend to come from patient capital, realistic return expectations, and careful sponsor selection.

If you keep your timeline honest, model fees and debt like a skeptic, and demand clean answers, a DST can earn a spot in your plan. If you need control or near-term liquidity, it usually won’t.