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HOW DO SALES COSTS OF DSTs COMPARE WITH TRADITIONAL REAL ESTATE?

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A common question that investors ask is “what are the sales costs associated with investing in DSTs as compared to traditional real estate?”

Selling costs for DSTs (sometimes called “load”) are expressed as a percentage of the total cash or equity that is invested and range from 8% to 12% on average. Selling costs for traditional income properties are expressed as a percentage of the total value of the property including both equity and debt generally varies from 3% to 6% for commissions plus approximately 1% for other sales costs including title insurance, legal, taxes, etc.

If you are purchasing a traditional income property valued at $2 million, your total sales costs may range up to 7% (6% commission plus 1% other costs) or $140,000. By comparison, if you are investing in $2 million of DST interests that have a 50% loan-to-value, you will need to invest $1 million in cash to acquire those assets. Comparable sales costs may range up to 12% of cash or equity that you invest for a total of $120,000 (12% x $1,000,000). This example is offered to point out that total sales costs of DSTs can be comparable to the sales costs of traditional real estate investments. Sales costs can obviously vary based on many factors and there are cases where the acquisition costs of DSTs can be higher than traditional real estate and vice versa.

It is important to keep in mind that all quoted DST returns are based on the full amount of cash invested. If you invest $1,000,000 to acquire DST interests and the first-year returns are targeted at 5%, you can expect to receive $50,000 of income, net of all costs.

As with all real estate, it is important to understand that investment properties must generally be held for a period to earn back related sales expenses associated with the acquisition. Per our previous example, if $2 million of DST interests are purchased with $1 million in equity and targeted annual returns are 5%, the investor will receive $50,000 per year paid monthly. It will therefore take up to 2-3 years to break even on the up-front sales costs – less if appreciation and loan amortization are applicable. For traditional real estate, net cash returns are often less than 5% (e.g., 2% or less in California), and the breakeven on sales costs could be somewhat longer.

While there are tangible costs associated with purchasing DST interests, overall costs can be comparable to traditional real estate. With a DST however, the investor is receiving added benefits including hassle-free income, attractive cash flow, and is relieved of loan responsibilities that may be required for investments in traditional real estate.

Each DST offering is accompanied with detailed documentation that spells out all associated costs. When investigating specific DST offerings, you should seek inputs from a knowledgeable securities representative, preferably someone with significant real estate experience, to determine the actual selling costs as well as comparisons to other investment options that you may be considering.