Chay Lapin is President of Kay Properties & Investments, a Delaware Statutory Trust real estate firm.
When investors look to generate passive, tax-efficient real estate income through a 1031 Exchange, they sometimes view Delaware Statutory Trusts (DSTs) and DST 721 Real Estate Investment Trusts (REITs) as providing near-identical benefits.
However, I find that treating these two investment vehicles as identical twins can be a costly oversight. So let’s look at a couple of key differences between these two investments.
Differences In Overall Investment Transparency
One of the most significant differences between Delaware Statutory Trust (DST) investments and REITs is the level of transparency investors receive. For example, DST investors often have access to detailed information about the property via the Private Placement Memorandum, including lease agreements, property financials, tenant leases, and debt terms.
Conversely, REITs operate under an opaque structure where key details can be difficult to discern. One example of this opaqueness is when REITs engage in related-party transactions, like selling properties between affiliated entities to meet financial goals. This can obscure the REIT’s true performance and raise concerns about conflicts of interest, especially if management prioritizes other objectives over investor returns.
Differences In Management Scope And Complexity
Another significant distinction between DSTs and 721 REITs is the scope of their investments and the respective management complexities associated with them.
For example, DSTs typically involve a single property or a small portfolio with a clearly defined business plan that is presented to investors in the Private Placement Memorandum (PPM). These clearly defined investment strategies can include incorporating a value-add management strategy to a multifamily property, improving operational income from a single retail center or holding a fully leased industrial asset until the asset runs full-cycle.
The REIT structure, on the other hand, typically involves multiple portfolios across multiple asset classes, including office, multifamily, industrial, medical and self-storage. As a result, these larger portfolio mandates require management to juggle multiple properties and strategies, including joint ventures, developments and debt investments. On top of this, REITs can change their investment strategy annually, making the investment journey anything but steady and unchanging. This scenario can lead to various unsavory results, including inconsistent performance and inefficiencies in operations.
In other words, the REIT an investor enters today might look very different two to three years from now. Even if the specific property you initially invested in performs as expected, other issues within the REIT can create unforeseen problems, such as credit issues, debt concerns and development delays.
With all that being said, investors are sometimes drawn to REITS because they can potentially offer greater diversification for an individual’s portfolio, which may reduce concentration risk.
Differences In Financial Structuring
While debt risk is a potential concern in both DSTs and REITs, how debt is structured differs significantly between these investment strategies.
For example, a DST typically has fixed debt terms that remain stable throughout the investment period or fixed for a known period, providing predictable financing costs. Usually, DSTs will have fixed-rate financing that is often 10 years in duration. As a result, DST properties generally have fewer moving parts tied to outside financing variables and typically involve a single loan with a fixed interest rate and a long-term duration period.
In addition, some DSTs investments can be 100% debt-free as a purposeful factor of the investment strategy. This debt-free structure can offer investors greater stability and a lower risk profile without the risks of flow sweeps and lender foreclosure.
Conversely, REITs tend to use higher leverage and a mix of floating-rate debt and credit lines that can expose investors to rising interest rates and potential liquidity issues. Oftentimes, these credit facilities are short-term in nature and last for a period from one to three years.
In addition, some REITs rely heavily on debt or equity infusions to maintain operations. In challenging markets, this can result in the REIT’s need to reduce distributions to investors or sell off properties at a loss. Programs such as the 721 Exchange Umbrella Partnership Real Estate Investment Trust (UPREIT) can also have dynamic debt equations, such as floating rate debt and short-term debt, that could involve a variety of financing changes over time.
Differences With Stock Market Connectivity And Overall Liquidity
Of course, investors of both Delaware Statutory Trusts and REITs can be impacted by broader economic conditions, including the stock market. However, the way these two entities are affected by fluctuating market behavior is drastically different.
DST investment returns are based on real estate fundamentals like actual lease income, capitalization rates, and property appreciation—all factors that are uncorrelated to stock market volatility. However, because DST investors own a fractional beneficial interest in a trust that owns a large piece of illiquid real estate, liquidity in DSTs can be limited. Investors should be able and willing to hold their investment in a DST 12031 property for the full life of the program, typically four to eight years.
REIT shares, on the other hand, are tied to the stock market and can be influenced by market volatility—regardless of the underlying real estate value. That said, investors holding Operating Partnership Units (OP Units) may have the option to liquidate them for greater liquidity, though doing so typically triggers a taxable event.
In summary, investors must carefully weigh these differences before allocating capital to a single REIT. A concerning trend I’ve observed is over-concentration, where investors commit a disproportionate share of their net worth to just one REIT rather than diversifying. While REITs offer liquidity, investing in just one can also expose investors to stock market volatility, and many rely on complex, often opaque financing structures.
I think a smarter alternative is diversifying across multiple real estate asset classes and geographic regions. This approach can limit exposure to market swings and opaque financial risks while providing more stable, property-driven returns.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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