Delaware Statutory Trusts (DSTs) have become one of the most popular passive real estate investment structures for 1031 exchangers seeking potential income, tax efficiency, and relief from active management. While DSTs offer pre-packaged due diligence, institutional-grade properties, and the ability to complete an exchange in as little as a few days, not all DSTs are created equal.
Selecting the right DST requires a disciplined, multi-layered evaluation process. While there is no means of guaranteeing success in any investment, based on industry best practices and lessons learned across dozens of market cycles, I believe the following are the 12 most important factors investors must consider before investing in any DST.
1. Financial Professional Experience: The #1 Predictor of a Successful DST Outcome
DSTs are highly specialized securities. The quality of your financial professional often matters more than the underlying property.
The greatest mistake investors make is selecting a financial professional based solely on superficial first impressions. What truly matters is deep operational experience—specifically, financial professionals who have personally:
Owned and managed rental properties
Overseen multifamily, NNN, industrial, or other income-producing assets
Navigated tenant issues, cash-flow disruptions, loan negotiations, and market downturns
Understand how a sponsor’s financial projections are built—and where they can be wrong
Have a deep understanding of the DST industry, including close relationships will all major players and at least 10 years prior industry experience.
Have an experienced and highly responsive support team that can promptly response to inquiries 7 x 24.
A financial professional with hands-on experience is far better equipped to interpret a DST’s underwriting, rent assumptions, reserve levels, sponsor strength, and long-term risks.
If your financial professional cannot explain these elements clearly and confidently, keep searching.
2. Sponsor Track Record & Financial Strength
DSTs are created and managed by firms called sponsors. Sponsors acquire the property, secure the financing, structure the trust, manage operations, and ultimately execute the exit strategy. This makes sponsor quality one of the most critical evaluation points.
Key questions to ask:
How many DST programs has the sponsor completed?
Have past offerings met or exceeded projections?
What is the sponsor’s capitalization and liquidity?
How did the sponsor perform during stress periods such as COVID, interest-rate shocks, or the 2008 downturn?
Does the sponsor have institutional-grade acquisition standards?
Today, there are over 60 DST sponsor companies. Sponsors like Cantor Fitzgerald, ExchangeRight, Capital Square, Bluerock, Four Springs, and Carter Exchange are among those with long operating histories, diversified platforms, and verifiable historical performance—attributes investors should prioritize.
3. Asset Class Reliability: Favor Multifamily & Investment-Grade NNN
Two asset categories have delivered the most consistent performance for DST investors:
Multifamily (Apartments)
A necessity asset class that has generally performed well even in challenging times
Short leases allow rapid rent adjustments during inflation
High demand across demographic groups
Strong long-term rent growth history
Investment-Grade NNN (Single-Tenant)
Potential for predictable income streams
Tenants responsible for taxes, insurance, repairs, and CAM costs
Historically recession-resistant when leased to strong-credit tenants
More volatile asset classes—hotels, office buildings, senior housing, or student housing—often come with higher targeted yields but significantly higher risk.
4. Diversification: Sponsors, Asset Classes & Locations
Diversifying across multiple DSTs helps to mitigate risk. A well-structured DST portfolio typically includes:
Avoidance of high concentration of funds in single investments
Two or more different sponsors
Multiple asset classes (e.g., multifamily + NNN + industrial)
Three or more geographic regions
This minimizes exposure to any one manager, property type, tenant category, or local economic shock.
5. Location Quality & Demographics
Location remains the foundation of real estate value. Critical factors include:
Population growth (Florida, Texas, Carolinas, Tennessee, Arizona—long-term leaders)
Employment growth and economic diversity
Tax and regulatory environment (landlord-friendliness matters)
Housing affordability and supply constraints
DSTs in markets with job growth and favorable demographics are better positioned for rent increases, lower vacancy, and stronger eventual exits.
6. Financing Structure & Loan Terms
DST loans are typically long-term, fixed-rate, and pre-negotiated—important benefits for stability. But details matter:
Is the interest rate fixed or floating?
Is the loan amortizing or interest-only?
Is the loan maturity aligned with the DST’s target hold period?
Are loan underwriting assumptions conservative?
Does the sponsor have a history of obtaining attractive loan terms and successful loan workouts or refinancings?
Well-structured financing is intended to help protect investors from forced sales or cash-flow pressure during economic downturns.
7. Appraisal Integrity & Underwriting Assumptions
Be sure that you or your DST professional reviews the appraisal and internal underwriting. Important questions:
Are cap rates aligned with local market comparables?
Are rent growth assumptions realistic—or overly optimistic?
Are expense loads accurately modeled?
Does the appraisal reflect deferred maintenance or required upgrades?
Aggressive underwriting is one of the top red flags across weaker DST offerings.
8. Third-Party Reports: Engineering, Environmental & Market Studies
DST sponsors provide institutional-quality due diligence packages, but investors must still review them. Key reports include:
Property Condition Assessment (PCA)
Phase I Environmental Report
Lease Abstracts or Audits
Market Rent Studies
Reserve analyses and capital needs assessments
These third-party documents are essential for validating the sponsor’s projections.
9. Onsite or Virtual Property Review
Even passive investors should understand what they’re buying. Recommended steps:
Visit the property (if practical)
Review drone footage or sponsor-provided virtual tours
Look at surrounding land uses, neighborhood quality, and traffic patterns
Check Google Earth history to see area changes over time
Use AI tools to determine area trends that may impact DST performance
A sight-unseen investment is riskier than necessary—especially with large equity placements.
10. Lease Structure Risk: NNN vs. Master Lease
DSTs generally use one of two structures:
NNN Lease
Strongest for predictable cash flow potential
Tenant pays nearly all expenses
Ideal for single-tenant assets (e.g., pharmacies, grocery stores, industrial logistics)
Master Lease
Necessary for multifamily and multi-tenant retail/industrial DSTs
Adds counterparty risk (master tenant often sponsor-affiliated)
Requires properly funded reserves for leasing and maintenance
Investors should understand which structure applies and the associated risks.
11. Distribution History & Stress-Test Performance
Track record matters. Review:
Has the sponsor ever suspended or reduced distributions?
Do distributions match property-level performance?
How resilient were payouts during COVID, inflation spikes, and rate increases?
Does the sponsor use sustainable cash flow—or reserves—to fund distributions?
The potential for predictability of income is a major reason investors choose DSTs; history should confirm this stability.
12. Exit Strategy & Hold Period Planning
DSTs are illiquid by design. Therefore, investors need clarity on:
Target hold period (usually 5–7 years)
Expected exit timing relative to interest rate cycles
Sponsor’s historical disposition performance
Market conditions required for a profitable sale
Whether refinancing is possible or prohibited
An informed exit strategy can be the difference between a strong IRR and a weak one.
Conclusion: A Disciplined Process Protects Investor Wealth
DSTs can potentially be outstanding 1031 replacement options—offering passive income potential, tax deferral, institutional real estate access, and simplified ownership. But success requires careful evaluation.
By prioritizing:
1. Advisor expertise
2. Sponsor strength
3. Asset class reliability
4. Proper diversification
5. Location quality
6. Financing terms
7. Appraisal and underwriting integrity
8. Third-party due diligence
9. Property review
10. structure analysis
11.. Distribution sustainability
12. Clear exit planning
. . . investors may be able to increase their chances of achieving stable income, long-term capital preservation, and tax-efficient wealth transfer.
How We Can Help
For more information, be sure to download a copy of my popular book entitled Real Estate Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST) – 2nd Edition.
Please contact the professionals at FGG1031 for personalized advice and guidance that can help you and your family best strive to achieve your objectives in 2025 and beyond.
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