Case Study: Retirees Exchange into a
Diversified Passive Income Portfolio
- By Austin Bowlin, CPA
- October 10, 2024
Table of Contents
This case study highlights the journey of a Bay Area couple transitioning from actively managing single-family homes, duplexes, and fourplexes to owning a portfolio of Delaware Statutory Trusts (DSTs) through a 1031 Exchange. Their experience provides valuable insights into the strategic planning and tax considerations for property owners looking to transition from active property management to retirement and passive income investments.
Case Study Snapshot
Meet Frank and Ann
Seeking a more relaxed retirement and relief from property management challenges, Frank and Ann transitioned to a passive income investment portfolio by leveraging a 1031 Exchange into a Delaware Statutory Trust (DST).
Background
Frank and Ann, aged 67 and 65, spent 17 years building an extensive real estate portfolio, including three single-family rentals (SFRs), two duplexes, and two fourplexes in the high-value Bay Area market. Initially, they managed the properties themselves to maintain control and maximize returns.
In 2020, seeking to reduce operational demands, they hired a third-party property management firm. However, the decision did not fully eliminate the need for their involvement and negatively impacted their cash flow distributions, leading them to reassess their investment strategy.
Challenge and Opportunity
Frank and Ann struggled with managing their rental properties, even with a property management firm. While it reduced some workload, they still had responsibilities and lower profit margins. Nearing retirement, they wanted to simplify and secure passive income. Their CPA advised that selling their properties would trigger significant tax consequences and recommended a 1031 Exchange to defer taxes. The CPA referred them to RETS, who designed an exchange strategy into a portfolio of DST properties with higher passive income potential.
Exchange Strategy
Transitioning to Delaware Statutory Trust (DSTs)
A Delaware Statutory Trust (DST) allows investors to hold fractional ownership in high-quality, income-generating properties, with all management handled by seasoned professionals, making it a truly passive investment.
RETS recommended DSTs for Frank and Ann’s 1031 Exchange because they effectively addressed their objective of achieving a fully passive investment strategy while offering high monthly cash flow from institutional-grade real estate. The low minimum investment, typically $100,000 enabled RETS to create a diversified portfolio across top geographic markets and property types, reducing risk and enhancing income stability.
Although DSTs limit direct decision-making and are not easily liquidated, the benefits of passive income, professional management, and strong cash flow outweighed these considerations. For Frank and Ann, DSTs offered a seamless solution to transition from active property management to a secure, diversified retirement income stream.
DST Portfolio Design and Objectives
The RETS team developed a tailored replacement property portfolio for Frank and Ann, encompassing 11 individual DSTs diversified across multiple property types and regions to align with their investment goals. The strategy served to secure full tax deferral, achieve a projected first-year cash flow with a 5.26% yield, and generate income largely sheltered from tax via depreciation.
Outcome and Strategic Implementation
Motivated by the alignment of DSTs with their lifestyle and financial objectives, Frank and Ann proceeded with the sale of their properties, reinvesting the proceeds into DSTs via 1031 Exchanges. The sales, conducted over a year, facilitated their successful transition to a diversified, passive investment portfolio conducive to their retirement.
| DST Property | Investment | Yield | Proj. Cash Flow | LTV | Location |
|---|---|---|---|---|---|
| Multifamily DST 1 | $450,000 | 6.50% | $29,250 | 38.13% | Houston, TX |
| Multifamily DST 2 | $500,000 | 5.0% | $25,000 | 46.02% | Gonzales, LA |
| Multifamily DST 3 | $485,000 | 4.10% | $19,885 | 46.26% | Knoxville, TN |
| Net Lease Retail Portfolio DST 1 | $550,000 | 5.00% | $27,500 | 40.23% |
Multiple
(13 properties) |
| Multifamily DST 4 | $385,000 | 6.50% | $25,025 | 38.63% | Orlando, FL |
|
Self-Storage Portfolio
DST 1 |
$600,000 | 4.03% | $24,180 | 0.00% |
Multiple
(3 properties) |
| Senior Housing DST 1 | $450,000 | 5.00% | $22,500 | 39.00% | St. Petersburg, FL |
| Senior Housing DST 2 | $780,000 | 5.75% | $44,850 | 0.00% | San Marcos, TX |
| Industrial Portfolio DST 1 | $600,000 | 5.00% | $30,000 | 0.00% | North Carolina |
| Industrial Portfolio DST 2 | $650,000 | 5.15% | $33,475 | 47.97% |
Multiple
(22 properties) |
| Net Lease Retail Portfolio DST 2 | $650,000 | 6.00% | $39,000 | 40.42% |
Multiple
(20 properties) |
| $6,100,000 | 5.26% | $320,665 | 33.42% |
Conclusion
The strategic shift from direct property management to Delaware Statutory Trust (DST) investments exemplifies a methodical approach to real estate investment, offering tax efficiency, income predictability and diversification. This case underscores the critical role of expert guidance in navigating the complexities of real estate investment and tax strategy, demonstrating a path to achieving retirement objectives through informed decision-making.
Speak with a Licensed Exchange Advisor
Navigating the complexities of 1031 Exchanges, DSTs, and UpREITs requires expert guidance. If you are an investment real estate owner with questions about 721 UpREIT Exchanges, DSTs, or estate planning, contact Real Estate Transition Solutions (RETS) to schedule a complimentary consultation with one of our licensed 1031 Exchange Advisors.
One of the aspects that sets RETS apart is our rigorous approach to due diligence. This process involves a thorough analysis of financial performance, market conditions, and potential risks associated with each property. Our team of 1031 Exchange Advisors works closely with you to ensure that every investment aligns perfectly with your financial goals, providing expert guidance and detailed insights every step of the way. This careful, strategic approach to due diligence is fundamental in helping you make informed decisions, safeguarding your investments, and achieving successful outcomes.
Our free consultations can be done over the phone, via web meeting, or in person at our offices located in Seattle, WA and throughout the West Coast. To schedule your free consultation, call 888-755-8595, email info@re-transition.com, or book directly with an Advisor online.
About Real Estate Transition Solutions
Real Estate Transition Solutions (RETS) is a consulting firm specializing in tax-deferred 1031 Exchange strategies and Delaware Statutory Trust investment property. For over 26 years, we have helped investment property owners perform successful 1031 Exchanges by developing and implementing well-planned, tax-efficient transition plans carefully designed to meet their objectives. Our team of licensed 1031 Exchange Advisors will guide you through the entire process, including help selecting and acquiring passive management replacement properties best suited to meet your objectives. To learn more about 1031 Exchanges and Real Estate Transition Solutions, visit re-transition.com or call us at 888-755-8595.
