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How Delaware’s Statutory Trusts Can Be a Solution for Investors in Today’s Market

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David is the founder and CEO of Realizeda company whose mission is to improve lives through innovative wealth solutions for real estate investments.

With interest rates and inflation rising, many investment property owners may be wondering what to do with their existing real estate investments. While the economic conditions of recent years have been conducive to creating a seller’s market, rising interest rates can present a challenge to investors considering selling their property now.

In the first week of May, the interest was more than 5.2%, an increase of almost 2% from the beginning of 2022. Mortgage applications for the purchase of a home are also declining, with new applications for the purchase of a home 8% down in mid-March compared to where they were a year earlier.

Rising interest rates make it more expensive for home buyers to borrow money. Home buyers looking to buy a new home will now have higher investment costs compared to buyers who wanted to buy a home a few months ago. The higher interest rates mean higher monthly payments, which means that mortgage lenders want to borrow less money. This, in turn, can lower the home’s value.

When there is a mismatch between the expectations of buyers and sellers, sellers may decide to take their properties off the market if they are unable to get the price they want for their property.

This can slow the market. But what can you do in a situation where you now have to sell an investment property? What if you want to remove yourself from tenant management or sell your investment property before interest rates continue to rise, like? it is predicted that they will do throughout the year?

For investors looking to sell a property now, avoid tax on their profits, and also don’t want to invest in real estate directly, a Delaware statutory trust (DST) may be a solution.

A DST provides accredited investors with a way to purchase fractional ownership in commercial real estate. The properties within the DST – multi-family, self-storage, industrial facilities and more – are professionally managed by a sponsor, easing the direct responsibility of real estate management for the investor. In addition, DSTs can give investors access to real estate across industries and geographic locations, which can help provide portfolio diversification and manage risk.

One consideration when deciding where to invest is the type of investment property. Properties with shorter leases, such as multi-family or self-storage, can give owners and investors the opportunity to keep rates in line with inflation. For individuals considering investing in a DST, research the underlying properties to determine if they allow rate increases. One benefit of choosing summer time multi-family housing is that the property sponsor will manage the rate increases on behalf of investors.

Another factor that investors should consider is the capitalization rate, or cap rate, of a property. The cap rate is determined by dividing the income generated on a property by the value of the property. In general, the higher the cap rate, the higher the initial return that an investment property is expected to generate.

For example, if the amount of net income (income minus expenses) that property A generates in one year is $5,000 and the value of property A is $100,000, the cap rate is 5%. If the income that Property B generates is $8,000 and the value of Property B is $90,000, the cap rate is 8.9%. In these examples, although the increase in property value is lower in property B compared to property A, because of the greater value of the cap rate percentage, property B could be a more viable investment opportunity.

As interest rates rise and fewer buyers make offers to buy real estate, investors can’t be sure what to do with their existing investment properties. For investors looking to sell real estate before interest rates continue to rise, professionally managed DSTs that enable rate hikes may be the passive solution to meet their investment needs.

Full disclosure† The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.


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