8A — September 11 - 24, 2020 — Financial Digest — 1031 Exchange — M id A tlantic Real Estate Journal
www.marej.com
1031 E xchange
By Louis Rogers, Capital Square DIVERSIFY TO REDUCE RISK: Don’t put all your eggs in one basket
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in different parts of the coun - try with different tenants. In this way, the inherent risks of the investment are sub - stantially diminished. If one property goes bad, the inves - tor still has four other invest - ments in their portfolio. The real estate recession of 2008 to 2012 slammed many real estate investments. A large number of investors learned the hard way about concentration risk, while investors who owned a more diversified portfolio fared much better. Following the recession, the previously common tenant-in-common structure was replaced by the Delaware Statutory Trust (DST) structure. A DST is an interest in a property that qualifies for Section 1031 ex - change treatment. Unlike a “whole” property investment, DSTs have a “sponsor” who does all the work in terms of acquisition, due diligence, financing, closing, asset/ property management, ac - counting, investor and tax reporting, and ultimately disposition of the asset at the end of the holding period. DSTs have a very low m i n i mum i n v e s tme n t amount, frequently as little as $50,000, which encour - ages diversification. Assume you are an exchanger with $250,000 of net proceeds from your sale and you would like to acquire a diversified replacement property port - folio to qualify for deferral under Section 1031. Un - fortunately, if you seek to acquire “whole” properties, you are out of luck. But you have a solution: acquire a portfolio of DSTs that are turn-key investments. And the best part, even a small investor can diversify with investment minimums so low. Bottom line – investors who own a more diversified portfolio enjoy reduced risk, especially during challenging economic times when com - pared to investors in a single asset. Section 1031 exchang - ers acquiring replacement property should diversify to reduce risk. In this way, you can both qualify for tax defer - ral and reduce the inherent risk of making new real es - tate investments. Louis Rogers is founder and chief executive officer of Capital Square. MAREJ
ith diversification, risk can be reduced in real estate in -
eggs. Building a diversified real estate portfolio can be a daunting task. Financial and background information on private real estate is not readily available and can be costly and time-consuming to obtain. As a “whole” property investor, the investment cost of most real estate assets is also significantly higher than stocks. Still, it’s possible to diversify your real estate investments in a number of ways: • asset classes , including multi-family, retail, medical, office/HQ, and industrial,
diversify by sponsorship, so that all of your assets are not sponsored/managed by the same real estate firm. For example, assume you are a Section 1031 exchanger who invests all your ex - change proceeds in a single replacement property. You are highly concentrated and at maximum risk. If that property suffers a melt- down, you could be wiped out. Instead, let’s say you divide your exchange pro - ceeds into several different investments and invest in a portfolio of five DSTs that have different asset classes
• geography , • tenants , • holding period, and • via a sponsor for secu - ritized real estate, such as Delaware statutory trusts (DSTs). By investing in different asset classes, different loca - tions, and properties leased by different tenants, you have a more diversified port - folio and generally less risk. Also, by diversifying your holding periods, all of your investments will not mature and have to be sold at the same time. And if you invest in DSTs, you may further
vestments. Instead of i n v e s t i n g in a single p r o p e r t y with concen - tration risk, p r u d e n c e dictates in - vesting in a numbe r o f
Louis Rogers
properties. Remember the old proverb: “Don’t put all your eggs in one basket”? Why? Because dropping the basket will break all the
Sponsor of DSTs for tax deferral under Section 1031 of the Internal Revenue Code and Qualified Opportunity Zone Funds for deferral and exclusion of capital gains taxes
Capital Square provides investors greater access to tax-advantaged real estate investments.
$2 billion+ in transaction volume
78 investment offerings sponsored
113 real estate assets acquired
www.Cap i t a l Square1031 . com | 877.626.1031
*August 13th, 2020
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