Growing up, you collect the deed to the Reading Railroad, State Avenue, and Park Place to then realize it’s not quite as simple as a roll of the dice. The advantages and profitability of real estate investments have become more well-known and popular in recent years. Markets are getting hotter while younger people are trying to buy instead of rent, grow their wealth, and prepare for retirement. Throughout all industries, we see people looking for additional sources of income through potential rental properties. Although a great strategy and likely a lucrative venture, not everyone can invest the time and resources to managing an apartment complex, an Airbnb, an office building, or another property that requires regular oversight. For a young entrepreneur, apart from the daily challenges, current prices make it difficult to afford one let alone several investment properties. But that does not mean there are not options for those still interested. There are ways to partake in the real estate industry at an affordable price without committing to the sole responsibility. Through fractional real estate, individual investors can purchase a percentage of commercial real estate ownership that would otherwise be unattainable.
Fractional ownership is an investment structure that allows multiple investors to purchase percentage ownership in an investment-grade asset. In the United States, there are two primary options for those interested in fractional real estate ownership: A Delaware Statutory Trust is a real estate investment vehicle that provides investors with access to investment grade real estate that is generally larger than they could have acquired on their own. The Taxpayer acquires a fractional interest (see below) in the property. Use of DSTs in 1031 exchanges was approved by the IRS in Revenue Procedure 2004-86. Delaware Statutory Trust (DST) and Tenant-In-Common (TIC) ownership.
Tenant In Common Ownership
Tenancy in common is the ownership of a real estate by more than one person. The Tenant-in-Common ownership was established in the 1990s. It is a form of shared tenure rights to properties owned. Each individual or tenant-in-common owns a separate interest in the property. The benefits include more buying power and shared responsibilities. A TIC also allows for continuous ownership if any other owner can no longer continue ownership, such as death or bankruptcy. An owner may sell his interest, initiate a sale, partition suit, or dissolve the tenancy in common. The TIC interest goes to the heirs of that owner rather than to the other tenants in common. The agreements between tenants in common usually deal with the sharing of expenses and provide one owner with the right to buy out the other owner when used. This ownership structure is a good option for potential investors who cannot afford a property’s total price and would like to share the property responsibilities.
Delaware Statutory Trusts
A DST is a legal entity created as a trust in which each investor owns a “beneficial interest.” The DST was developed as a solution to some of the downfalls of a TIC. A TIC requires all the co-investors to agree on any action. It can only have a maximum of 35 investors, and lenders must underwrite all the borrowers within the TIC structure. A DST does not allow for any input from beneficial interest owners, meaning no need for unanimous agreement, the IRS does not have a stated limit for the number of investors a DST may have, and unlike in a TIC, a lender only underwrites a single borrower for a DST, making it easier to secure financing. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. These investments generally pay quarterly based on the excess rent over the property expenses, including mortgage payments. The rate of return varies from deal to deal based on the specifics of the property and financing. Typically, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the investment term. A DST is a great option for those who wish to diversify their portfolio by including some real estate elements. They allow individuals to rely on a specific return and avoid having to work directly with tenants.
The importance of financial literacy has been brought more attention through the growth of the internet and social media. Real estate investments are not just for moguls that purchase hotels or corporate executives buying shopping malls. There are many options for those young and old that want to diversify their portfolios, begin acquiring assets, or are already ready to upgrade their property. The standard fix and flip of houses has been a very well-known wealth-building strategy. The simple idea of buying a cheap home that needs fixing, making the repairs, and selling for a profit does sound like a piece of cake. Most of the time, the part that gets left out is how much you owe in taxes after receiving that money. Buying a house and making repairs also isn’t as attainable as it once may have been. It takes a lot of time and more money than what you’ll find in your piggy bank. Long-term investment in real estate and then exchanging for more can bring a much higher financial benefit, and it is a strategy that anyone can take advantage of. Yet, many don’t because they think they don’t qualify, can’t afford it, or believe it won’t make a difference, which is not true. It’s time to get into the real estate game, talk to a financial advisor to see if a TIC or DST may be right for you, and get your dice rolling.
Accruit’s team of experts are available to help answer questions, work through your 1031 exchange concerns, and facilitate exchanges in cases where it is advantageous. Contact Accruit by phone – 800-237-1031 or visit our blog to learn more.