Background

Many times, real estate investors have held onto their properties for what seems like an eternity. 20, 30, 40 years… We’ve even spoken to clients whose parents bought their property in the 60’s – That’s 60 years ago! Man has time flown.

Recently, we had the privilege of being able to serve a client like this by helping them take their real estate ownership and 1031 exchange out of California. The client decided to sell their 4-plex for just under $2 million and move their equity elsewhere to get ahead of the potential storm that’s coming. The storm being; the state of California’s aggressive regulations against the landlord’s ability to keep up with the market, make a profit, and do what is in the best interest of their property.

The Appeal

After decades of personally managing this asset, combined with the continual fight against CA government overreach, we were happy to talk with this client and give them a few ideas that had aimed to fulfill both of their investment objectives: to go completely passive and take their equity out of state.

Getting a better idea of what they truly wanted gave us the opportunity to share with them some high-quality assets which are diversified across multiple state lines. What they liked even more was how they could participate in owning institutional quality property while taking on non-recourse debt in an effort to propel them into a new depreciation schedule. We advised them to speak with their tax advisor, but assuming non-recourse debt may offer the ability for them to shelter more of their rental income through depreciation.

Check out our recent articles that talk about the potential benefits of DSTs and non-recourse debt.

How it Got Done

Through many in-depth conversations about what they were looking for and what types of properties they were comfortable with, we were able to build a portfolio of four Delaware Statutory Trusts (DSTs) to recommend to them.  Since they were coming out of a multi-unit 4-plex property and were comfortable about that property type, two out of the four DSTs remained in the multifamily space, which ended up being just under half of their equity.

We also shared with them a few other deals which included a self-storage asset that had shown historically strong operating performance, and a multi-tenant industrial asset with the same potential for increased returns based on its recent performance and the business plan of the sponsor to raise rents while simultaneously lowering their expenses (increasing NOI).

The client loved the process. And because we were diligent in ensuring they were well educated on each deal, they felt like they made the best-informed decisions for their investments.

Conclusion

If this case study seemed pretty cookie-cutter, it’s because it was. The client’s desires were clear, and their goals aligned well with the objectives of what we were able to offer them. As independent DST advisors, we are seeing cases like this more often, especially with where California legislation is going and the innate desire for some to take their real estate ownership passive to the greatest extent.