DST Investment Risks: Problems, Horror Stories & What Can Go Wrong

Common DST Investment Problems

Three fundamental problems define most DST investment challenges: lack of control, illiquidity, and fee structures that materially reduce returns.

Lack of Control Issues

DST investors are passive beneficiaries so the sponsor makes every operational decision about the property. You cannot influence leasing strategies, approve capital expenditures, select property managers, refinance debt, or control the timing of property sale.

This is not by choice, rather it is an IRS requirement. Revenue Ruling 2004-86 established seven specific restrictions that DSTs must follow to maintain qualification for 1031 exchanges. These restrictions prevent the trustee from varying the investment, raising new capital, renegotiating loans, modifying leases, or making major capital improvements without jeopardizing the structure's tax status.

If the property underperforms, a major tenant leaves, or if the sponsor makes decisions you disagree with, you have no mechanism to intervene. You cannot vote out the sponsor, force a sale, or change the management strategy. Your only option is to wait for the sponsor to sell the property and hope the outcome is acceptable.

This differs fundamentally from direct property ownership, TIC structures, or private equity real estate funds where investors typically have some voting rights or ability to remove the general partner for cause.

Illiquidity Challenges

DST interests are private placements with no established secondary market. You should assume you cannot sell your interest until the sponsor sells the underlying property.

If you need capital for medical expenses, family emergencies, or unforeseen financial obligations, you likely cannot access your DST investment. If market conditions deteriorate and you want to reallocate capital, you are illiquid.

Fee Structure Concerns

DST sponsors charge multiple layers of fees that reduce net returns. For a detailed breakdown, see our DST fees and debt analysis. Common fee types include acquisition fees ranging from 1-3% of property value, annual asset management fees typically 0.5-1.5% of property value, property management fees commonly 4-8% of gross revenue, and disposition fees usually 1-2% of sale price.

Total upfront loads commonly reach 8-15% of invested equity. If you invest $1,000,000 and the load is 12%, only $880,000 is working capital in real estate. You must overcome this drag before realizing any net gain.

These fees are typically embedded in the offering structure rather than billed directly. You see them as lower projected returns and reduced cash distributions, not as line items on invoices. The cumulative impact over a five to ten year hold period is significant. Returns are quoted net of these fees so you do not have to account for their drag on performance yourself.

DST Horror Stories and Cautionary Tales

Real-world DST failures provide specific lessons about sponsor risk, property selection, and market exposure. These are documented cases where investors lost principal or experienced returns significantly below projections.

Financial Risks of DST Investments

DST investments are real estate. They carry the financial risks inherent in commercial property ownership plus additional risks created by the DST structure.

Market Risk

Property performance is influenced by supply and demand dynamics, economic conditions, demographic trends, and capital markets. During the 2008-2009 financial crisis, commercial property values declined 30-40% in many markets. DST investors experienced these losses directly.

Economic recessions reduce tenant demand, increase vacancies, and pressure rental rates downward. Property values can decline significantly even when the property is well-maintained and professionally managed. DST investors bear this market risk fully with no mechanism to hedge or exit positions when market conditions deteriorate.

Regional economic problems compound market risk. Local job losses, industry concentration, corporate relocations, or demographic shifts specific to a property's market can materially damage value and income independent of national economic trends.

Property-Specific Risk

Many DSTs hold a single institutional-grade property. There is no internal diversification to offset tenant loss or property-specific problems. If the property underperforms, your entire investment is affected proportionally.

Single-tenant net-lease properties are particularly exposed. Loss of the anchor tenant can collapse cash flow immediately. Long-term leases may lock in below-market rents while investors bear full downside risk if the tenant fails or chooses not to renew.

Sector and geographic concentration amplify property-specific risk. A DST focused on office properties in a single metropolitan area is exposed to both sector trends affecting office demand nationally and local economic conditions specific to that market.

Leverage Risk

Most DSTs use non-recourse debt at the property level. Typical leverage ranges from 50% to 70% of property value. This debt amplifies outcomes in both directions.

If property value declines and income is insufficient to cover debt service, the lender may foreclose. DST investors would lose their entire equity investment. DST restrictions prevent refinancing or debt restructuring during the hold period. If a loan matures during a weak market, the sponsor may be forced to sell at a discount rather than refinance.

The inability to add new equity capital compounds leverage risk. If the property experiences financial stress, the sponsor cannot conduct a capital call to reduce leverage or preserve equity value.

Interest Rate Risk

Rising interest rates affect DST investments through multiple channels. Higher rates push capitalization rates higher, which mathematically reduces property values. A modest increase in cap rates can significantly reduce exit value and investor equity even when rental income remains stable.

Many DST properties have long-term fixed leases with minimal rent escalations. Rental income does not adjust proportionally as interest rates rise. DST restrictions prohibit refinancing during the hold period. Investors cannot capture lower interest costs if rates decline after formation. They are locked into the original loan terms regardless of subsequent market conditions.

Sponsor-Related Risks

DST returns depend entirely on sponsor competence, judgment, and integrity. You are delegating complete authority over a long-term, illiquid investment to a third party with no mechanism to remove them if performance disappoints.

Sponsor Bankruptcy Risk

The DST property is owned by the trust, not the sponsor. If the sponsor declares bankruptcy, the property itself is typically protected from sponsor creditors under trust law. However, sponsor bankruptcy creates significant operational disruption.

The sponsor ceases normal operations while addressing outstanding debts. Property management continuity is interrupted. Communication with investors becomes uncertain. A successor trustee must be appointed through legal proceedings. This transition period creates instability and may take months.

The biggest impact is often temporary loss of distributions while operations stabilize. Cash flow may be disrupted even when the property itself is performing adequately. Selecting sponsors with proven financial strength and operational stability reduces this risk materially.

Conflicts of Interest

Sponsors have multiple potential conflicts of interest that can affect investor returns. Many sponsors use affiliated companies for property management, leasing, and other services. These arrangements create fees that flow to the sponsor or its affiliates.

Sponsors may hold or sell properties based on their own economic incentives rather than optimal timing for investors. If the sponsor needs to raise capital for new offerings, it may push for property sale even when market conditions suggest continued holding would benefit investors more.

Acquisition conflicts arise when sponsors sell properties they already own as a DST. The sponsor benefits from the sale price, disposition fees, and ongoing asset management fees. This creates incentive to overprice the property relative to its fair market value.

Track Record Concerns

Performance depends heavily on sponsor acquisition discipline, underwriting accuracy, and asset management capabilities. Large, experienced sponsors whose business does not solely rely on the sale of DSTs tend to excel. Review our DST investments 2026 guide for sponsor profiles and evaluation criteria.

On the other hand, sponsors with limited DST experience may lack the expertise to structure offerings properly, maintain IRS compliance, or manage the operational complexities of multiple beneficial owners. Poor initial underwriting creates problems throughout the investment term. Weak asset management allows problems to compound over time.

Due diligence on sponsor track record should focus on actual performance versus initial projections, not just number of offerings or total capital raised. Sponsors with consistent performance that meets or exceeds projections demonstrate competence. Those with wide variation or consistent underperformance raise legitimate concerns.

Structural Limitations of DSTs

IRS Revenue Ruling 2004-86 requires specific operational restrictions to maintain DST qualification for 1031 exchanges. These restrictions are commonly called the Seven Deadly Sins. They create structural inflexibility that can turn manageable problems into serious losses.

No Refinancing Allowed

The trustee cannot renegotiate existing loan terms or obtain new secured financing after formation. The property operates with its original debt structure for the entire hold period.

If interest rates decline significantly, the DST cannot refinance to reduce borrowing costs. If the property's value increases substantially, the DST cannot extract equity through refinancing. If the original loan matures during weak credit markets, the sponsor may face difficulty refinancing and potentially forced sale at unfavorable prices.

The inability to refinance constrains financial flexibility precisely when it would be most valuable. Direct property owners can adjust their capital structure in response to market conditions. DST investors cannot.

Cannot Sell Interest Easily

No active secondary market exists for DST interests. Most DST trust agreements restrict or prohibit transfers without explicit sponsor consent. Even when transfers are theoretically permitted, finding buyers and agreeing on pricing is exceptionally difficult.

Private sales of DST interests typically occur at significant discounts to estimated net asset value, if they occur at all. The illiquidity discount may reach 20-40% of theoretical value. Many investors find no buyers at any price.

Limited Exit Options

Investors must wait for sponsor-controlled sale events. Typical hold periods are five to ten years, sometimes longer. You cannot force a sale even if you believe market conditions are favorable or if you need to access capital.

When the DST sells its property, the trust must terminate. All net sale proceeds must be distributed to beneficial owners. The DST cannot reinvest proceeds in replacement property. This forces a taxable event or new 1031 exchange for investors who wish to maintain tax deferral.

Some DSTs offer 721 UPREIT conversion options where investors can exchange DST interests into operating partnership units of a REIT when the property is sold. However, these provisions are not universal and come with their own set of considerations and restrictions.

No Investment Decisions Allowed

Beneficial owners cannot vote on property operations, leasing decisions, capital expenditures, financing matters, or sale timing. The trustee's authority is complete within the trust agreement terms.

Investors cannot force the sponsor to sell a property even when market conditions appear favorable. They cannot prevent a sale if they believe continued holding would be preferable. They cannot approve or reject major leasing decisions, capital improvements, or strategic repositioning.

This is a buy-and-hold play for the entirety of the business plan. The investment thesis established at formation cannot be modified regardless of how market conditions or property fundamentals evolve.

Hidden Fees and Costs

DST fee structures can be complex, make sure to review the PPM with your Anchor1031 rep.

Acquisition Fees

Sponsors charge acquisition fees for sourcing properties, conducting due diligence, negotiating purchase terms, and structuring the DST. Typical fees range from 1% to 3% of the property purchase price.

These fees are often bundled with organizational and offering expenses, broker-dealer fees, and sales commissions into a total upfront load. Combined front-end costs commonly reach 8-15% of invested equity. These fees are usually financed within the offering structure rather than billed separately. You see them as higher property acquisition prices or lower equity investment in the property, not as direct charges on statements.

Management Fees

Ongoing fees include asset management fees paid to the sponsor, typically 0.5-1.5% of property value annually, and property management fees paid to the property manager, typically 4-8% of gross revenue.

These fees are deducted from property net operating income before distributions to investors. They directly reduce cash-on-cash returns and overall investment performance. Unlike direct property ownership where you might negotiate management fees or change providers, DST investors have no control over these ongoing costs.

Disposition Fees

When the property is sold, sponsors typically charge disposition fees of 1-2% of gross sale price.

Disposition fees are taken from sale proceeds before distribution to investors. They reduce your share of appreciation and equity available for subsequent 1031 exchange or cash distribution.

Total Fee Impact on Returns

The cumulative fee load over a typical hold period is significant. Consider a property acquired for $100 million with 50% equity: upfront acquisition and offering costs of $1.5-3 million, annual asset management fees of $500,000-$1.5 million annually over seven years, annual property management fees of $300,000-$600,000 annually over seven years, and disposition fees at sale of $1-2 million.

Total fees might reach $7-20 million on a $50 million equity investment over seven years, representing 14-40% of total equity depending on specific fee structures and property performance. Assuming typical 50% leverage on a $100 million total deal cost, this represents 7-20% of the entire deal cost. Even when gross property returns appear solid, net-to-investor returns after fees may disappoint materially. A property generating 7% gross returns might produce 4.5-5.5% net returns after all expenses.

Due Diligence Red Flags

Certain warning signs indicate elevated risk and merit either rejection of the investment or substantially deeper due diligence before proceeding.

Legitimate sponsors welcome due diligence questions and provide comprehensive, verifiable information proactively. If a sponsor or their representatives are evasive or defensive when you ask about these items, that itself is a red flag.

How to Mitigate DST Risks

DST investment risks cannot be eliminated. They are inherent in the structure. However, several strategies can reduce overall portfolio risk and improve likelihood of acceptable outcomes.

Diversification Strategies

One of the DSTs greatest value propositions is diversification. Asset class diversification spreads risk across different sectors of commercial real estate. Geographic diversification reduces exposure to regional economic problems. Sponsor diversification eliminates dependency on a single sponsor's judgment and operational capabilities.

A typical portfolio might involve three to five different DST investments of $100,000-$500,000 each, two to three different property types, properties in three to five different metropolitan areas, and two to three different sponsors with strong but distinct track records. Browse current DST offerings to see available diversification options.

Sponsor Due Diligence

Evaluate sponsor track record with the same rigor you would apply to property-level underwriting. Request specific performance data on prior DST offerings including initial projected returns versus actual distributions and sale proceeds, properties that performed significantly below projections, timing of property sales relative to initial projections, and sponsor financial strength and stability over time.

Verify sponsor claims through independent sources including FINRA BrokerCheck, SEC Investment Adviser Public Disclosure, state securities regulator databases, court records, and references from qualified intermediaries and other professionals.

Interview the sponsor directly with specific questions about performance history, underperformance situations, property sourcing and pricing, asset management approach, and sale timing determination. Competent sponsors with solid track records will answer these questions directly and provide supporting documentation.

Property Analysis

Conduct property-level due diligence as if you were acquiring the property directly. Analyze market conditions including population growth, employment trends, new construction and absorption rates, rental rates and occupancy trends, and supply and demand dynamics.

Review tenant quality including financial strength and credit ratings, lease terms, historical rent payment performance, and business model stability. Verify property condition through third-party property condition assessment, comparison of reserve estimates, assessment of building systems, and environmental compliance verification.

Analyze financial projections by comparing projected rental rates to current market rates, verifying expense estimates, assessing realism of occupancy projections, and evaluating reserve adequacy. Properties that pass rigorous due diligence are not guaranteed to perform well, but they have materially better chances than properties acquired without thorough analysis.

Fee Comparison

Calculate total fee load and net-to-investor returns for any DST you evaluate. Request detailed fee schedules including all upfront fees, ongoing fees, and backend fees.

Compare these metrics to direct property ownership costs, public REIT fees, and alternative DST offerings. Fee comparison may reveal that some sponsors structure offerings more favorably for investors than others.

When DSTs Are NOT Appropriate

Certain investor profiles and circumstances make DST investments unsuitable regardless of property quality or sponsor reputation.

Active Investors Seeking Control

If you want to make decisions about property operations, leasing, capital improvements, or sale timing, do not invest in DSTs. DSTs are designed for passive investors who want to eliminate management responsibilities entirely.

Short-Term Investment Needs

If you might need access to invested capital within five years, DSTs are inappropriate. There is no reliable exit mechanism during the hold period. Plan to hold for the full investment term and structure your overall portfolio accordingly with appropriate liquidity reserves outside DST positions.

Highly Risk-Averse Investors

DSTs carry meaningful risk of principal loss. They are not guaranteed investments or capital preservation vehicles. Real estate market exposure, tenant default risk, property-specific problems, and leverage risk can all produce losses of invested capital. The illiquidity of DSTs makes losses particularly problematic since you cannot exit positions to limit losses when problems emerge.

Frequently Asked Questions

Conclusion: Balancing Risks and Benefits

DST investment risks fall into several clear categories: structural limitations imposed by IRS requirements, financial and market risks inherent in commercial real estate, sponsor risks arising from complete management delegation, fee loads that reduce net returns, and illiquidity that eliminates exit options during the hold period.

Documented cases exist where investors lost principal, received returns significantly below projections, or were trapped in poorly performing investments with no recourse. Sponsor fraud, property underperformance, market downturns, and structural inflexibility have all produced negative outcomes for DST investors.

At the same time, DSTs serve a genuine purpose. They provide passive ownership for investors exiting active property management. They offer rapid execution for investors facing 1031 exchange deadlines. They allow diversification across multiple properties at lower minimums than direct ownership would permit. For investors with appropriate circumstances and objectives, these benefits can outweigh the risks.

The key is informed decision-making. Understanding DST investment risks before committing capital allows you to evaluate whether the structure aligns with your specific objectives and risk tolerance, conduct meaningful due diligence on sponsors and properties, structure appropriate diversification, and assess whether projected returns adequately compensate for the risks and limitations involved.

Invest only after thorough due diligence confirms the specific offering meets your requirements, the sponsor has demonstrated competence and integrity, the property fundamentals support projected returns, and the fee structure is reasonable relative to alternatives.

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. Consult with qualified legal, tax, and financial advisors before making investment decisions.

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