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What are passive real estate investments?

On Behalf of | Nov 15, 2021 | Commercial Real Estate, Real Estate |

While investing in commercial real estate, such as multifamily properties, is a great way to enhance your portfolio, not everyone has the capital to invest in truly lucrative properties. Fortunately, there are investment opportunities that require a lower maintenance commitment.

Kiplinger provides insight into two passive real estate investment strategies that prove quite profitable in certain situations. By understanding how these strategies work, you can make an informed decision when investing.

Delaware Statutory Trusts (DSTs)

DSTs are very similar to trusts used for estate planning purposes. Up to 499 individuals can invest in DST properties, which usually include very large multifamily properties or industrial buildings. Because they own an undivided fractional interest in commercial properties, investors are also owners of said properties. However, trustees are responsible for managing properties and making important decisions regarding them. Investors must usually make a minimum investment of $100,000 for inclusion in DSTs.

Tenants-in-common (TIC)

A TIC is another co-investment strategy that functions similarly to DSTs. Because TICs has a lower investor limit of 35 individuals, investments are typically much higher than with DSTs. For example, each investor may need to provide between $250,000 and $1 million for inclusion in a TIC.

They are often less passive when compared to DSTs, but TICs have an added benefit of a cash-out refinance after a few years have elapsed. That means investors can retain some of their equity and re-invest it into other properties.

Both DSTs and TICs allow investors to take part in a “like-kind” exchange, also known as a 1031 exchange. These transactions allow you to defer taxes by reinvesting equity after a sale into a similar property. Taxes only apply once a sale occurs and equity is not re-invested.