DST vs REIT vs Direct Property: Which Real Estate Investment is Right for You?

Quick Overview of Each Option

Delaware Statutory Trusts (DSTs)

A Delaware Statutory Trust is a legal entity created under Delaware statutory law that holds title to commercial real estate. You own a fractional interest in that trust. The game-changing development came in 2004 when IRS Revenue Ruling 2004-86 determined that beneficial interests in DSTs qualify as "direct interests in real estate," enabling DSTs to be used as replacement property in 1031 exchanges.

You typically invest $25,000 to $100,000, giving you fractional ownership in institutional-grade properties often valued at $30 million to $100 million. These are properties typically accessible only to institutional investors. DSTs are completely passive investments. Year one yields have historically been in the 4-7% range, with distributions paid quarterly. Distributions are not guaranteed. The catch? Your investment is locked up for 5-10 years with no secondary market for liquidity. You also surrender all control. The sponsor/trustee makes every decision about the property.

To invest in a DST, you must be an accredited investor, meeting SEC requirements of either $200,000 annual income ($300,000 for couples) or $1 million net worth excluding your primary residence.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts are companies that own, operate, or finance income-producing real estate across various property sectors. Unlike DSTs, which are trusts holding specific properties, REITs are corporations. There are two main types: public REITs and private REITs.

Public/Exchange-Traded REITs trade on major stock exchanges and offer public market liquidity. You can buy or sell shares instantly during market hours, just like stocks. You can start investing with as little as the price of one share (often $50-$200), making public REITs the most accessible real estate investment option. However, public REITs are subject to stock market volatility and may trade at prices disconnected from the underlying real estate value.

Private REITs (also called non-traded REITs) are not listed on public exchanges. They typically require higher minimum investments ($2,500-$25,000+), have limited liquidity with redemption restrictions, and are often sold through broker-dealers. Private REITs may offer more stable pricing since they are not subject to daily market fluctuations, but investors should carefully evaluate fees, which can be higher than public REITs.

Tax treatment for REITs differs significantly from DSTs. Dividends are taxed as ordinary income at your marginal rate (up to 37% federal), not the favorable qualified dividend rate. You receive no pass-through depreciation benefits. The critical limitation: REITs are NOT directly eligible for 1031 exchanges. REIT shares are classified as securities (personal property), not real property, disqualifying them from like-kind exchange treatment.

However, there is a path from real estate to REIT ownership while deferring taxes: the 721 exchange (also called an UPREIT transaction). Investors cannot exchange directly from real estate into a REIT, but they can first complete a 1031 exchange into a DST, then later convert their DST interest into REIT operating partnership units through a 721 exchange. This DST-to-721 path allows investors to eventually hold REIT shares while deferring capital gains taxes. Note that once you complete a 721 exchange, those proceeds lose future 1031 exchange eligibility. For most individual investors, contributing property directly to a REIT is not practical because their individual properties typically do not meet the REIT's acquisition criteria.

Direct Property Ownership

Direct property ownership is the traditional approach: you purchase physical real estate, hold title in your name (or entity), and control all aspects of the investment. Investment requirements are the highest. Residential rental properties typically range from $100,000 to $500,000+, while commercial properties can cost millions.

The defining characteristic is control. You make every decision: which tenants to accept, how much rent to charge, when to renovate, what financing to use, and when to sell. This control enables value-add strategies: buying underperforming properties, improving them, and capturing the appreciation.

However, control comes with responsibility. Direct ownership demands 5-20+ hours per month for self-management. Returns can be substantial. Net yields of 6-10%+ are achievable for skilled investors. Tax treatment is favorable with full depreciation deductions and 1031 exchange eligibility.

Quick Comparison Table

Detailed Comparison: 10 Key Factors

1. Liquidity and Exit Options

DST: With DSTs, the decision to sell is not in the investor's hands. The sponsor, as manager of the trust, determines when to sell the property and return capital to investors, typically over a 5-10 year hold period. Many investors are comfortable giving up this control because they no longer want to manage real estate themselves. They're done with the headaches of tenants, maintenance calls, and property management decisions. Instead, they want to pursue the potential for passive income on properties that are professionally managed by institutional real estate companies. These investors are willing to accept limited liquidity because they're investing for long-term cash flow and potential appreciation, not short-term trading.

Public REIT: Public REITs offer unparalleled liquidity in the real estate world. You can sell shares instantly during market hours at the current market price.

Non-Traded REIT: Non-traded REITs have limited liquidity. Most have redemption programs allowing quarterly or annual redemptions, but these programs often have caps and can be suspended during market stress. Expect to hold for 3-7 years until a liquidity event (listing, merger, or liquidation).

Direct Property: You control the sale timing completely, but executing a sale takes 30-90 days typically. You'll pay 5-6% in broker commissions and closing costs.

2. Control and Decision Making

DST: You surrender all control when investing in a DST. Cannot vote on property decisions, cannot force a sale, cannot approve lease terms, cannot change management. This complete passivity is required by IRS Revenue Ruling 2004-86 to maintain 1031 exchange eligibility.

Public REIT: You're similarly passive with public REIT investments. Professional management teams make all property-level decisions. You may vote on major corporate matters as a shareholder.

Non-Traded REIT: Same passive structure as public REITs. Management makes all investment and operational decisions. Shareholders have minimal control over property-level decisions.

Direct Property: You're the captain of the ship. Every decision is yours: which tenants to accept, what rent to charge, whether to renovate, and when to sell. This control enables value-add strategies.

3. Minimum Investment Requirements

DST: You need $25,000 to $100,000 minimum per offering. You must also meet accredited investor requirements.

Public REIT: Public REITs win the accessibility contest. You can buy a single share for $50-$200 through any brokerage account. No accreditation requirements, no minimums.

Non-Traded REIT: Minimums typically range from $2,500 to $25,000+. Some require accredited investor status, while others are available to non-accredited investors meeting suitability requirements.

Direct Property: You need the full purchase price, minus financing. A $300,000 rental property requires $60,000-$75,000 down (20-25%) plus closing costs.

4. Tax Benefits and 1031 Exchange Eligibility

DST: DSTs offer maximum tax benefits for passive investors. You're treated as a direct owner for tax purposes. Your 1099 shows your share of income and depreciation. Most importantly, DSTs are fully 1031 exchange eligible.

Public REIT: REITs provide the least favorable tax treatment. Dividends are taxed as ordinary income. You receive no pass-through depreciation benefits. Public REITs are NOT 1031 exchange eligible.

Non-Traded REIT: Same tax treatment as public REITs. Dividends taxed as ordinary income, no depreciation pass-through, and NOT 1031 exchange eligible. However, non-traded REITs may provide some return of capital distributions that reduce your cost basis.

Direct Property: Direct ownership delivers maximum tax benefits with full depreciation deductions and 1031 exchange eligibility.

5. Management and Time Commitment

DST: Zero hours per week. The sponsor handles everything: property management, tenant relations, maintenance, accounting. You receive quarterly distributions (not guaranteed) and an annual tax document. That's your entire workload.

Public REIT: Equally passive. You receive dividend payments and a simple 1099-DIV at year-end. No property-level involvement.

Non-Traded REIT: Also completely passive. You receive distributions (often monthly or quarterly) and annual tax documents. No management responsibilities.

Direct Property: Budget 5-20+ hours per month minimum for self-management. Many owners hire property managers for 8-10% of rental income.

6. Diversification Potential

DST: Moderate diversification. Each DST typically holds one property or a small portfolio. You can spread capital across multiple DSTs for diversification.

Public REIT: Extraordinary diversification. A single REIT index fund provides instant exposure to hundreds of properties across multiple sectors: industrial, healthcare, residential, data centers, self-storage.

Non-Traded REIT: Good diversification within a single non-traded REIT, which typically holds a portfolio of properties. However, less diversified than public REIT index funds and concentrated in the sponsor's chosen strategy.

Direct Property: Concentrated exposure to one property, one location, one asset class. Diversifying requires buying multiple properties and substantial capital.

7. Fees and Costs

DST: Fees are substantial. Upfront fees typically total 7-15%+ of your investment. Annual asset management fees run 1-2% of property value. Disposition fees at sale are typically 1-3%. For a detailed breakdown, see our DST fees analysis.

Public REIT: Public REITs have the lowest fees, typically 0.5-1.5% annual expense ratios. No sales commissions on most public REIT purchases through brokerage accounts.

Non-Traded REIT: Non-traded REITs typically have higher fees than public REITs. Upfront selling commissions can range from 0-7%, plus organization and offering costs. Ongoing management fees of 1-2%+ annually. Total fees over a hold period can be substantial.

Direct Property: Costs are transparent and negotiable. Acquisition: 5-7% for closing costs. Ongoing: Property management (8-10% if hiring a manager), maintenance and repairs. Exit: 5-6% broker commission.

8. Leverage and Financing

DST: The sponsor determines all financing terms before you invest. Properties typically carry 40-60% loan-to-value (LTV) ratios with non-recourse debt. You are not personally liable if the property defaults.

Public REIT: Public REITs handle leverage at the corporate level. Professional treasury management teams optimize financing across the entire portfolio. Leverage levels are disclosed in public filings.

Non-Traded REIT: Similar to public REITs, leverage is managed at the corporate level. Leverage ratios vary by sponsor and strategy. Review the prospectus for specific leverage policies.

Direct Property: You control all leverage decisions. Want 80% LTV to maximize returns? Available (if you qualify). Prefer 50% LTV for safety? Your choice.

9. Estate Planning

DST: Beneficial interests are easily divided among multiple heirs. DST interests qualify for step-up in basis at death, eliminating capital gains taxes for heirs.

Public REIT: Estate planning is simplest with public REITs. Shares divide easily in any percentages. Step-up in basis applies. Heirs receive simple 1099-DIV reporting.

Non-Traded REIT: Shares can be divided among heirs, though the process may be more complex than public REITs. Step-up in basis applies. Heirs may need to wait for a liquidity event to access value.

Direct Property: Leaving a single property to multiple heirs often creates problems. How do you divide one rental house among three children?

10. Investor Suitability

DST: Ideal for retiring landlords exhausted from property management, 1031 exchangers under time pressure, accredited investors wanting institutional-grade assets, and passive income seekers willing to sacrifice liquidity.

Public REIT: Suits the broadest investor base: beginning investors, liquidity-focused investors, retirement account investors, diversification seekers, and small capital investors.

Non-Traded REIT: May suit investors seeking real estate exposure without stock market volatility, those comfortable with limited liquidity but not wanting full DST illiquidity, and investors who don't need 1031 exchange eligibility.

Direct Property: Fits hands-on investors who enjoy active management, value-add seekers with renovation skills, wealth builders with 10-30 year horizons, and experienced real estate professionals.

Pros and Cons Summary Tables

Delaware Statutory Trusts (DSTs)

Public REITs

Non-Traded REITs

Direct Property Ownership

Decision Tree: Which Is Right for You?

Real-World Scenarios: Which to Choose

Can You Combine All Three?

Absolutely. In fact, many sophisticated investors choose to combine multiple real estate investment structures rather than concentrating in just one, seeking to balance liquidity, tax benefits, and control across their portfolio.

Consider a $500,000 total real estate allocation structured as:

Benefits of the Combined Approach

Liquidity Management: The REIT portion remains accessible if you face unexpected expenses. You never need to liquidate illiquid positions at unfavorable terms.

Tax Optimization: DST and direct property portions maintain 1031 exchange eligibility, allowing perpetual capital gains tax deferral.

Risk Diversification: Your portfolio spans hundreds of properties through public REITs, a diversified portfolio through non-traded REITs, one DST property, and one direct property.

Lifestyle Flexibility: This allocation includes highly liquid public REITs (40%), tax-deferred passive DSTs (30%), stable non-traded REITs (20%), and active direct property (10%), providing a balance across liquidity, tax benefits, and control.

Frequently Asked Questions

Conclusion and Next Steps

The choice between DSTs, REITs, and direct property is not about finding a universal "best" option. It is about identifying what aligns with your unique situation, goals, and preferences.

Some investors choose to combine all three types rather than selecting just one. The specific allocation depends on individual circumstances, goals, and risk tolerance.

Real estate investment strategies may evolve as life circumstances change. Liquidity needs, time availability, and tax situations can shift over time, and investors may adjust their portfolio composition accordingly. There's no requirement to commit permanently to one structure.

This article is for educational purposes only and does not constitute legal, tax, investment, or financial advice. DST investments involve risk, including possible loss of principal. Past performance does not indicate future results. Distributions are not guaranteed. Consult with qualified legal, tax, and financial advisors before making investment decisions.

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