14A — March 16 - 29, 2018 — 1031 Exchange — Financial Digest — M id A tlantic
Real Estate Journal
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1031 E xchange By Edward Fernandez, 1031 CrowdFunding, LLC Breaking Even: How to Choose a DST for Your 1031 Exchange
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s the l eading on- line marketplace of 1031 exchange quali-
tional grade real estate. Here is an excellent excerpt from our Q&A section. Question: How do I break even with this DST? I’m looking to in- vest $100,000 into real estate. I want to increase the value of my principal, but I under- stand there is no guarantee that any investment will increase my principal. I want to grow my investment, but if I can’t do that, I certainly do not want to lose money. Answer: To truly break even or “get back to par,” two things must
happen. One, you must re- ceive back the total amount of capital you used to purchase the asset. Two, you must re- ceive back an amount equal to all principal payments made to pay down the debt on your investment. When we evaluate the DSTs that come across our platform, we do a sensitivity analysis to determine the conditions needed to both return your initial investment and also to get you back to par. For example, let’s say you invest your $100,000 in a DST with a 60% loan-to-value
ratio, acquiring $150,000 in debt for a total $250,000 worth of beneficial interest in a $10 million offering. Over 5 years, 20% of your debt is paid down, lowering your debt total by $30,000. Some investors would be satisfied if the property sold for $8.8 million, enough to pay the remaining $4.8 million loan and still return the original equity investment. While this may be acceptable in a down market, the property is still being sold for below what was originally paid. This represents a $30,000 loss of
the equity built by debt pay- ments made on the investor’s behalf. To fully break even, the property would need to ap- preciate in value enough to 1) Overcome any fees associated with the DST, 2) Repay the original equity investment, and 3) Recoup the principal payments made on behalf of the investor. In order for any piece of commercial real estate to increase in value, one of two things must happen. Either the NOI on the property needs to increase, or the market needs to increase in the form of cap rate compression. Since it is difficult to predict market conditions at the time of sale, at 1031 Crowdfunding we focus our property analysis on making sure that there is enough NOI growth potential to keep the investor at or above par. Additionally, in a DST there can be no capital calls or ad- ditional money invested into the property beyond typical maintenance and capital ex- penditure needs. Because of this, the original principal paid into the DSTmust be able to appreciate in value based on the property performance and not based on additional capital investments. Any real estate investor should look for prop- erty that can appreciate in value without being a “money sink,” investing in real estate through a DST is no different. A major benefit of DSTs is the presents of a professional management team known as a sponsor. A sponsor’s proven track record brings significant experience to the process of se- lecting investment properties capable of producing competi- tive cash flow and appreciation at the time of sale. While having an experi- enced Sponsor behind a DST adds credibility, it does not replace the need for individual investors to do their own due diligence. To supplement this due diligence, we at 1031 Crowdfunding carefully ana- lyze and evaluate each DST independently and can help match you with a DST that suits your investment needs. 1. www.therealestatecrowd- fundingreview.com/1031- crowdfunding-review-and- ranking Edward Fernandez is Founder /CEO of 1031 Crowdfunding, LLC based in Orange County, CA. n
f i e d De l a - ware Statu- tory Trusts (DSTs) 1, one of the pr i - mary ques- tions we get from inves- tors involves preservation
Edward Fernandez
of capital and how a DST “breaks even.” DSTs are a vehicle for exchangers to pool their capital with other inves- tors to purchase large institu-
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