REAL ESTATE WITHOUT THE HEADACHES: DST’S FOR PILOTS

Tim: [00:01:11]Welcome to this episode of Pilot’s Portfolio. My name is Timothy P. Pope, certified financial planner and owner at 360 aviation advisors, where we specialize the planning needs of the professional pilot. Guys it is great to be back with you, great to be back behind the mike. Took a little time off end of summer, right before school started and right before the busy fourth quarter in the office. And it was a good time, I discovered mountain biking! It was thrilling, I loved it, the kids loved it and I think we’re gonna be doing a little bit more of it.

[00:01:46]Right, I survived, I’m alive, I still have my medical. I had to call a fellow podcaster, a good guy, Nick Fialca. Now if you guys listen to him, you can see what type of bike he uses when he shredding the trail. So good times, I might be in the market for a bike. So before we get to the meat of today’s content I wanna say thank you. So we got some listener feedback, as you will recall. If you’re just joining us, if this is the first episode of you listening, I don’t know. A month ago, two months ago we wrapped up a loss of medical series. We went through all the major passenger carriers. And then we heard from some of you. You guys did not let us get away with it.

[00:02:27]You said hey don’t leave out the cargo side, so I put it to you. I said hey, you guys wanna hear this, the fright dogs out there, do you guys wanna hear this? And you said yes. There’s a couple of emails that came in, so let’s pull those up and see what you had to say. So this first one is from Derrick who says 401k scam. So Derrick is actually responding to the last podcast that we put out where we’re asking if your 401k is a scam. So he says “hello, I also work for UPS, our union does a really good job of telling us how awesome our lost of medical and AD&D insurance is. But I’d like to hear how it compares and possible gaps I don’t know about.

[00:03:08]He says I haven’t heard anyone say 401k is a scam, but, some I’ve talked to rather put their money in real estate. Rather than the limited options the company offers for investments. I’ve tried to tell them about how Dave Ramsey went bankrupt because he started financial advising. But they think there is no chance mortgages will ever be called again like that. Love the show, cheers Derrick.

[00:03:31]So Derrick thanks for listening, thanks for writing in. And yes, keep sharing the good news with your fellow pilots. Diversification is important and never say never about any asset class wither it’s the public market, private market, real estate, or gold, so never say never about any asset classes. Let’s see,

so we got another one and this one comes from Jeff. Jeff says “hi, i’m a twenty three year FedEx triple seven captain, I enjoy your show along with several others”. Similar podcasts such as Passive Income Pilots, what’s up Tate and Ryan, good guys over there. He says that he would also like to hear some analysis and inclusion on the cargo side of the airline business. We quite often get overlooked by many of the podcasters. Thanks Jeff, Jeff thanks for writing in.

[00:04:20]So, look I appreciate you guys for writing in, appreciate the feedback. We got a pretty busy content calendar for the 4th quarter, but what we’ll do, you got my commitment, it’s in the air. We will get that UPS and FedEx loss of medical analysis out to you, you know in the coming months we’ll say. So certainly before the end of the year, so you guys can enjoy and use that. The other thing I wanna let you guys know about, you know, I’m toying with this idea of like changing some of the content a little bit. And ideally I’m wondering about a somewhat live portion of where you guys can, instead writing it, you’re more than welcome to write in the comments, but for those who want a real time interaction, where you can come on the show and ask your questions and get a real time feedback. That could be interesting and would diversify some of the content on how we do the show. So if you’re interested, if you’d like to come on, if you’d like to get some of your questions answered. Because I guarantee if you have questions, there’s like one hundred other guys in the same exact boat that have the same questions.

[00:05:29]So email me info@pilotsportfolio.com let’s chat and let’s make it happen. So with today’s episode, you’ve probably heard when you sell it, it’s the best day of your life. I’m actually not talking about a boat, I’m talking about managing rental properties yourself that perhaps you stumble into owning these renal properties. Or perhaps you intentionally sought them out, wanting to own them, wanting to manage them yourself and then you realized that your time is not best spent managing the property so we’re talking about how you can actually sell that property. Lock in whatever capital appreciation that you have, but then defer paying the tax, right. So Trevor Flor, founder of Aim Point Invest, US Navy veteran and major airline pilot. He joins me today to discuss how you can accelerate, making one of the best days of your life come true by selling that property and capturing the game on it but deferring the tax, so not paying the tax. If it doesn’t make sense for you to pay them right now. So I think you’re gonna get a lot out of today’s conversation and I hope you enjoy it.

[00:06:46]Well, folks, as I mentioned in the intro, we’ve got a real treat for you. Today’s episode, we’re joined by Trevor Flor. Trevor, welcome to Pilot’s Portfolio.

Trevor:[00:06:58]Tim, great to be here. Thanks for having me on.

Tim:[00:07:01]Absolutely. Well, tell us about your aviation background.

Trevor:[00:07:05]Yeah, man. So, I started my career as a real estate broker but in 2007 took a hard left turn, and after some light flying during my high school years through the civil air Patrol organization, I just decided I wanted to pursue military aviation. So, I departed my real estate career in 2007 and applied and then went through the OCS program with the Navy. I spent 10 years in the Navy flying the F 18 Super Hornet. I flew the E model, which is the single seat model operationally, and then I finished as an instructor flying all models of the F 18. And during that time, I was lucky enough to serve in Japan. I was able to live in Japan, and then we would cruise three, it was a three year tour there, but every year we would spend six months underway on the aircraft carrier. So, got to do a lot of touring the Pacific and flying on and off the aircraft carrier. And then when that time came to an end, I flew for Delta Airlines. I say part-time for a period of time, and, just recently gave that up so that I could focus on what we’re here to talk about, which is my advising practice helping people make real estate investments.

Tim:[00:08:17]Yeah. Well that’s interesting. So you flew on and off in high school and then you decided to go the military route. Now, this was in 2007. This was before the great recession, so your timing to maybe jump out of real estate was probably, you know, was it seems like that was fortuitous.

Trevor:[00:08:37]You hit the nail on the head. I was helping people purchase residential real estate for about a five year period. And, then I had gotten into some commercial real estate for the last couple years. You know, I should have seen the writing on the wall, but my, you know, I was new in my career and I didn’t really know what signals to look for, for a bubble forming, but, as I left that industry and kept in touch with my colleagues that stayed in real estate, it was a very tough time. The global financial crisis pushed a lot of salespeople outta that industry, a lot of investment professionals, so it turned out to be, yes, a very well timed exit. But I can’t take any credit for it, it was not, ’cause I saw the bubble forming.

Tim:[00:09:18]Right. And then the aviation that you stepped into was, not a walk in the park. I mean, you’re on the F 18, you’re landing on carriers quite demanding.

Trevor:[00:09:28]Yeah, I loved it. Anyone who’s trained in the military knows. They have a very crawl, walk, run style of training. And I was not thinking

airplanes for a long time when I started that training. Lucky enough I could hang on because the training was so good at helping you learn the academics of it before you get into the simulator and then you learn the procedural stuff before you get into the airplane. So it was great training. I enjoyed it. I took it very seriously and really loved every minute of it.

Tim:[00:09:59]Well, that’s awesome, man. So now full circle. You’re back in real estate. Tell us what you’re doing now.

Trevor:[00:10:06]When I got out of the Navy in 2017, I completed a master’s program in real estate, so that kind of helped me bridge my pathway back into real estate and, right as I finished that program. I got aligned with a securities broker dealer headquartered out of Atlanta called DAI Securities, and I was hired on at DAI Securities to perform due diligence on what are called DSTs. And I had no idea what a DST was. I had handled some 10-31 exchanges, tax deferred exchanges during my days as a real estate broker. But, I had never heard of A DST, and it was kind of briefly explained to me through the hiring process. These are, you know, large commercial kind of institutional quality assets and, you’re just gonna evaluate the real estate. We’re gonna have you look at the quality of the real estate. We’re gonna have you underwrite the financial projections, and that’s what I came on to do. So over a two year period, I became an expert on the commercial real estate that would end up in these specific structures called a DST.

[00:11:16]And after a couple years, I was getting a lot of people calling me, a lot of advisors calling me and asking me questions about what the quality of the asset was or, what’s the structural nuance of, of this property. And, I realized I was becoming somewhat of an expert and I thought it would be a lot of fun to circle all the way back to my days as a real estate broker, and talk directly to the clients and educate the clients. So I got licensed in a series seven and 66 securities license, and then formed my current firm AIM Point Investments. And now my exclusive focus is just helping clients who are going through a 10- 31 exchange or considering a 10-31 exchange where a DST may become their replacement property. And in addition to that, we offer qualified opportunity zones and other real estate partnership investments, for investors that just want exposure to high quality commercial real estate but don’t want to be active owners of real estate.

Tim:[00:12:21]So there’s a lot there and I’ve got lots of questions. Tell us first and foremost, what is a DST?

Trevor:[00:12:27]Yeah, so A DST it stands for Delaware Statutory Trust, and that sounds like a lot, but all it is a trust, which is an entity that’s formed in the state of Delaware under statutory trust. And this specific structure, if it holds real estate, the beneficial owners of the trust are treated as direct owners in the real estate held in the trust. And the reason it exists is because prior to 2002 investors who were considering a 10-31 exchange, they wanted an opportunity to have a partnership style investment in their 10-31 exchange. But the complication is, and at some point, Tim, maybe we can back up and talk more about the exchange itself, but in an exchange, one of the requirements is that the entity or the taxpayer that owns the real estate, when that sells in an exchange, that same ownership entity has to purchase the replacement property. So where the complications were occurring is when one partner in a partnership wanted to do something different than all the other partners, and there really wasn’t a solution for that one partner because the partnership would have to be the entity performing the exchange. The DST solved that problem, so now an investor can be an individual that invests in a DST property as an individual. And when that DST property sells, they can do another exchange and exit the partnership as an individual. So, to summarize all that, it’s a fractional ownership structure that’s specifically permitted by the IRS as direct interests and real estate for the purpose of a 10-31 exchange.

Tim:[00:14:27]So the DST is an answer to the 10 31. So, let’s talk about a 10-31 for those listeners who already own investment properties or, maybe rental properties, they may be familiar with what a 10 31 is, but for those that are thinking about it, they may not be familiar with what a 10 31 is and its advantages. So talk to us about what a 10 31 is and then maybe we’ll bridge that gap and discuss how that DST is an answer to it or solution for it.

Trevor:[00:14:57]Yeah great next place to go. So, the DST as I mentioned, is really a purpose built tool for the 10 31 exchange. So, what is the 10 31 exchange? The 10 31 is a very powerful tool for owners of investment real estate. . Let’s talk about an owner of a primary residence. So let’s say we don’t own investment real estate. We own a property that we live in when we live in that property and we meet the primary use covenant of having used it as our primary residence for two out the last five years when we sell that property. Our capital gain, which is basically the price that we’re selling the property for less expenses minus the price we paid for it. That portion is usually, there are some adjustments to that, but simply put that portion is our capital gain. if the asset is owned longer than one year, that’s a long-term capital gain.

[00:15:55]Well, if the property meets the primary use outline of using it as a primary residence for two of the last five years, we can exclude up to $500,000

of that gain if we’re married, or 250,000 if we’re single, where we just don’t have to consider that a taxable portion of the gain. We just exclude either 250 or 500,000.It’s a great benefit and we see a lot of owners of their primary residents taking advantage of that. It’s called a Section 1-21 exclusion, where we don’t get any benefit is when we own investment real estate. So, investment real estate, according to the IRS, is usually property that has a tenant. It doesn’t have to have a tenant, but usually we have a tenant in there and usually we’re owning it for longer than a year.

[00:16:45]And I bring that up to say that there are a lot of home flippers, owners that, that buy real estate do some improvements and turn around and sell it eight months later. That is typically not treated as investment property that’s treated as property held for resale. So it’s gotta be investment property, but once we sell the investment property, there’s no ability for us to exclude any portion of that gain. So, the seller of the property is typically gonna be taxed on that same math we did for the long-term capital gain calculation but they’re also taxed on all the depreciation they took on the property that hopefully they took depreciation ’cause it’s a powerful tax benefit. But, as you know, the depreciation is a non-cash deduction that we’re allowed to use to offset the income that property generates, but all of the lifetime depreciation that we’ve taken during the ownership period that gets recaptured by the IRS at 25%.

[00:17:50]So we’ve got our capital gains, we’ve got our depreciation, recapture. That’s at the federal level. If you live in a state income tax state, which most of the United States does, there’s likely also a state tax component, and there may also be a net investment income tax of 3.8% if we exceed certain income thresholds. So, often we see the sale of these investment properties incur very significant tax liabilities.

Tim:[00:18:18]So just to move it from. The theoretical to the practical, real estate prices have surged over the last 10 to 15 years and so if owners have purchased property and they’re looking at selling the property, you’re probably looking at a capital gain. It’s just that easy in particular, I’ve worked with a number of military families. You guys are moving every couple of years, and some of them have, you know, acquired a property or two in that process. And they’re renting it out and so on and so forth. And then at some point they’re thinking about selling it. Well, because of what the market has done over the past 10 to 15 years, it’s likely they’re sitting on a capital gain, and since it’s not your primary residence, there’s really no capital gain exclusion that’s available to us.

Trevor:[00:19:15]That’s right. And it’s a great use case. Now, I will add, I get, calls from my friends and former colleagues or referrals from those friends and former colleagues in the Navy that do exactly what you described, Tim. They buy a place every time they get PCS. They turn it into a rental and they buy a new place at their next PCS station wherever they get based next. And so by the time they retire from the military, they may have three or four properties that are now rentals. Now, there is one important benefit that you are likely familiar with, that allows us to extend that primary residence test. If it’s a military owner, we can extend that up to 10 years. So we can, in some cases, take a two out of 15 year period to achieve that section 1-21 exclusion. So, that’s first and foremost. We want to check to make sure that the owner is, or is not eligible for that. Now, if they are not eligible for that, then when they look to sell the property, we would look to a 10 31 exchange, because when we sell the investment property, we can defer all the capital gains taxes that we would owe, all those layers of tax we walked through.

[00:20:28]We can defer that. Meaning we don’t pay it in the year of sale and in fact, we never have to pay it if we continue to own real estate under the Section 10 31 exchange But, the requirements of the exchange itself are. We have to buy as much or more real estate than we are selling. So if we sell a $500,000 property net of all sales costs, then we have to buy at least $500,000 worth of property, as a replacement. And we have specific timeframes that we have to observe to make sure that we’re complying with the exchange rules and the timeframes are on the date that our relinquished, that’s the property we’re selling. So, on the date that our relinquished property sale closes, we have 45 days to identify a replacement property. And what would be nice is if the IRS just allowed us to say, I’m gonna identify the United States and, and everything in it. But, that’s not how it works. They’re wiser than that. So they have restrictions on how much we can identify. The most common rule, is called the three property rule, so in that case, we can identify up to three properties. We also have a rule that we use a lot in my world, called the 200% Rule, where we can identify any number of properties. So long as the aggregate value doesn’t exceed 200% of the value of our relinquished property, that’s a mouthful. But it means that if I sell a property for 500,000, I can identify up to a million of properties, and that’s across any number of properties, but their aggregate value cannot exceed a million dollars in that example. And then there’s a third rule called the 95% rule that I honestly have never seen anyone use. It’s kind of a catchall. So those are the two that, I’ll limit our conversation to, but we have that 45 day period to use one of those rules to identify. And then we have an additional 135 days to close on only what we’ve identified.

[00:22:47]So the 45 plus, the 1 35 means the exchange has to be complete within 180 days. So that’s, you’ll hear a lot of people that know that, that figure,

oh, it’s a, I have six months to reinvest. And yes, you do have six months to close, but the more important deadline we see that disrupts a lot of exchanges is that 45 day identification deadline.

Tim:[00:23:09]What’s the process to identify ’cause you, you know, hey, from the date of, of when I sell this or relinquish my current property, I’ve got 45 days to find another spot to put the money. And, if I don’t identify, then the deal falls apart. Those capital gains are going to be due and I’ve interrupted my compounding returns, which I don’t like to do. So what is that process to identify my next properties?

Trevor:[00:23:35]As you know, our tax system in the United States is a self-reported system. We’re gonna tell the IRS what we’re doing. And, the IRS is gonna tell us if they want to audit us and force us to prove our claim. The identification is a similar part of that same system. So every time we do a 10-31 exchange, we have to engage what’s called a qualified intermediary or a QI. They’re also sometimes referred to as an accommodator. But this is a third party. It’s required by the exchange rules that we engage this third party to hold the funds in between the sale and the purchase. And they’re often, title companies will serve this role. But, many times we have standalone companies that are performing this service for us and they just hold the funds. But the way that we identify is that qualified intermediary will keep an exchange case. They’ll keep a file of all of our paperwork, and they typically have a worksheet. It’s usually just a three or four page worksheet, and we will have to submit that worksheet to them by midnight on the 45th calendar day, not business day. So we will write down, we have certain requirements on how we wanna describe the property. We have to include certain information, but we’ll, essentially we’ll list it on the identification worksheet and then submit that to our qualified intermediary who will hold it in our exchange file. And, that way, if we do ever get audited, we go to our qualified intermediary and we produce the exchange file. To prove that we met the identification requirements. And that’s, by the way, something that while I, my specialty is DSTs, I also advise the client through the exchange. So part of my service is to make sure that we’re adhering to those timelines and making sure that we’re completely and correctly completing those identification sheets. The CPA and attorney that the client has on their team will also be part of that process, of course. that’s who we submit that identification sheet to, is the qualified intermediary.

Tim:[00:25:48]Okay, so 45 days depends on what you have going on in your life. May not be an entirely incredibly long period of time. A lot of folks that I work with are. Fairly busy just with family life and then flying and you know, the, their work and so on. So you’ve got 45 days to identify and then you’ve got

another 135 days to close. I think it’s a good thing that you can identify three, because how many times if somebody, you’re going through the process of closing something and then it falls apart at the last minute. So talk to me about that and how the DST helps.

Trevor:[00:26:27]You’re absolutely right. It is very common for investors to work very hard at the sale of their relinquished property. That they are not focused at all during that process, on finding the replacement. They think I have 45 days, and that’s plenty of time. And then the clock starts ticking, and they start making offers, or they start really looking at the inventory. Maybe they just want to buy a property in a, very specific neighborhood and well, nothing’s on the market. And now one week has passed, two weeks have passed. That 45 days, while it seems like a while it comes very quick where we end up approaching that ID deadline and then investors start getting kind of frantic. So the DST is good in a situation as a primary solution. So investors who want to move away from active management and into a more passive investment, we can diversify them across several different DST properties. Without stacking management responsibility on them because they are truly passive. But, the case that you’re mentioning here is a very common case where they’re used as a backup or to save the exchange where we approach an ID deadline without strong replacement options.

[00:27:48]I had a case just two weeks ago where we used it in this way. Exactly, it was an exchange investor in California who had sold about a $2 million property and he purchased, he had under contract two multi-family properties. They were small multifamily properties that he was going to spread the $2 million across, and he kind of pushed back on my suggestion that we should identify A DST as a backup. He said, I know the owner who’s selling these properties. I know they’re good properties. I’m gonna close on ’em. I know it. And I said, well, it’s not gonna hurt you to add an additional DST to backup one of them. And so he identified, a DST. We took ’em through our options that were available at that time of DST properties. One of the nice things about DSTs is the deal is already packaged. The property has already been acquired, so we know exactly how high the occupancy of the property is. We know exactly what the debt on the property is. We can look at the track record of the sponsor. We can evaluate the projections the sponsor is making around cash flow. So all of that is available at our fingertips, unlike direct title, where we go under contract and then we start doing our due diligence. That’s all available to us before we even identify.

[00:29:10]So in this particular case, we identified a DST as a backup. The client not thinking he would need it, and as they went through the physical

inspections, they discovered that the existing owner didn’t even realize there was a foundation issue on one of the properties. And they could have remedied it, but it was gonna take hundreds of thousands of dollars for them to remedy this issue, and he just didn’t want to deal with it, so he ended up dropping that property out of escrow and diverting those funds instead to the DST. We identified and completed his exchange with a full tax deferral. So that’s a great way to use the DST as a backup, I get calls all the time from clients that are saying, hey, I want to exchange, but I don’t want a DST. I want to, buy another rental. We want to use it part-time, or Airbnb, you know, this property. And I say, great, let’s focus on that as the primary strategy. But it’s gonna be an hour or two hours of your time to spend with me to select a good DST and put it on your ID worksheet. As a backup if you don’t get the loan that you were expecting as you work through with your mortgage broker, or if you discover a physical deficiency or you haven’t gone under contract yet and you can’t come to terms on price, now we have a DST identified and we can still complete the exchange. So, that’s a great use case for the DST.

Tim:[00:31:37]So with the DST you mentioned. Hey, you can use it as a backup. You can use it as a primary. I’ve heard sometimes with single family homes it’s kind of like a boat, right? Like the best day of your life is when you sell them because, when you think about managing single family properties, it is not passive at all. If you’re the one managing it, like. Leaks are not convenient. They don’t happen Monday through Friday, and, you know, tenant issues and collecting rent and so on and so forth. Like it goes on and on. So for folks that are saying, oh man, I’ve, I’ve had a good run, but I think I’d like to have a hands off approach to my real estate investment. So passive, what kind of investment properties are available through the DST?

Trevor:[00:32:23]Any owner of investment real estate will agree with you. Is not a passive investment. Even if you have a property manager, you’re managing a manager. If you’re managing the property directly, then you are dealing with the tenants, toilets and trash. So, it is absolutely, an engaging and active investment type. Some investors are okay with that and they have the time and maybe they’re handy and they kind of like that work, and others realize after some period it may not be for them. So absolutely, that investor would be a candidate to move to passive investment through a DST. The mechanics of creating A DST are simply, we have a company that is an experienced operator of commercial real estate. Refer to that company as a sponsor and the sponsor is gonna go out and find a property, usually a commercial property, a brand new multifamily, complex 250 unit class, a complex as an example. Industrial property, Amazon Fulfillment Centers, sometimes end up in DSTs storage facilities, hotels. We see all different property types, the process is that the

sponsor is going to first identify and acquire the property, then they’re going to form a Delaware statutory trust, the entity that we have to hold the property in.

[00:33:46]They’re gonna move the asset into the trust, and then they will, if they want to put debt on it, they’ll put the debt on it, but now they have to go find the investors. And what they’re selling to the investor is called the beneficial interests of the trust. So they’re gonna go find exchangers that wanna purchase these beneficial interests in the trust. And the investor can select any amount as long as it’s available. So there may be, a hundred million dollars property, let’s say, and maybe they got 50% of that in debt. So they have a $50 million debt and $50 million in equity, and that’s what they’re selling is that $50 million in equity. So as long as it hasn’t been fully sold out. An exchanger can pick any amount between zero and 50 million, and that’s the percentage of the property they own. the investor, if they’re selling one $500,000 property and they want to have a single DST investment, they can put all $500,000 into that property.

[00:34:53]They would be buying 1% of the deal, and they would own 1% of that 250 unit multifamily property. So what we can do very easily, is we can build portfolios of DSTs so we can enhance, some of the risk mitigation through diversification. So that 500,000 maybe we look to spread that across two or three different properties. Now, the investor owns three different DST investments. Maybe it’s a multi-family property in. Jacksonville, Florida, a storage complex in Dallas, Texas, and a hotel in Charlotte, North Carolina. You know those three assets, the investor now owns a small percentage of, That’s the experience. And then the investor just sits back and collects their percentage of ownership of the rents minus the expenses.

Tim:[00:35:47]Okay, so the type of properties it, it varies, commercial, multifamily, industrial, storage you name it, it sounds like it varies. Now, another question for you is, let’s say that I’ve, you know, the past 10 years, I have a property, it’s appreciated nicely. Do I have to move? Do I have to 10-31 exchange everything, like all of my gains, or maybe I need some cash or want some cash to do something else? Can I peel some cash off and then invest the rest in a 10-31?

Trevor:[00:36:24]What you’re describing, Tim, is called a partial exchange, so you can hold back some cash in the exchange. The nomenclature for that is called Cash boot. So we are receiving some cash boot, that exits the exchange and unfortunately cash boot is taxable. So if we sell a property with no debt on it for 500,000 and we wanna hold back 50,000 of that, we can do that. But we’re gonna pay taxes on that 50,000. And, generally Some tax rates can be up to 25% plus state plus the net investment income tax. Typically, the tax treatment for

Cash boot starts with the worst or the least favorable tax treatment. So it ends up being very expensive from a tax perspective for us to do that, but it is an option.

Second part

Tim:[00:37:20]So it sounds like if you have a 10-31 or you’re selling a property that has appreciated very nicely, you could take some cash out if you needed. But, from what you’ve said, maybe think twice about doing it. ‘Cause it could be pretty expensive from a tax perspective.

Trevor:[00:37:40]Exactly right. It may end up not being in the best interest of the client. We treat the 10-31 exchange as a very powerful tax benefit, and generally speaking, we want to take advantage of that tax benefit. So unless there’s no other source of liquidity to the client, we would not want to tap these funds for another purpose. We’d want to get the benefit of the tax deferral under the exchange.

Tim:[00:38:05]Uninterrupted compounding.

Trevor: [00:38:07]That’s right.

Tim:[00:38:08]That’s what it comes back to, so Trevor, it really sounds like the DST is super flexible in terms of the type of properties that you have access to

Trevor:[00:38:18]That’s right.

Tim:[00:38:20]A 10-31, and also how you can use it as a primary, a secondary strategy, or so forth.

Trevor:[00:38:26]That’s right. And one strategy we haven’t talked about is a complementary strategy. So we can certainly usher the investor from active management to passive management. So we would call that using a DST as a primary strategy. Then we talked about utilizing it as a backup. So we’re trying to buy another direct title asset, but in case that property doesn’t close, we identify a DST as a backup. So, that would be the backup strategy. But the third option and way that we would use it is as a complimentary strategy. And that’s where we talked about, we have to exchange, in value for as much or more real estate as we are selling. So if we sell a $500,000 property net of fees, we have to buy $500,000 a property. Well, what if the investor really wants to buy a property, but it’s 300,000? That happens often. Sometimes the numbers are a little bigger, but it happens often where an investor wants to buy something that

doesn’t meet the full replacement requirements. And in that case, we would be taxed on that portion that we didn’t exchange.

[00:39:39]So using those numbers, if we sold 500,000, we bought 300,000. That 200,000 we did exchange would be taxable and it might be that we don’t even get much tax benefit at all from the exchange if we don’t replace that 200,000. So this is where a DST can come in and, down to the penny, whatever you have left, we can invest in A DST and allocate to A DST to provide full. replacement and full tax deferral. So that’s a great third use that we use the DST for.

Tim:[00:40:15]Seems like the DST is the easy button for folks getting out of either Active Real Estate management, or. Maybe they’ve got a deal that is completed and they’re looking to broaden their options or diversify their real estate holdings and not interrupt the compounding. And so, you know, via the use of a DST, you can look at much broader options without you actually having to go put boots on the ground and so forth. So if I’m understanding you right, one of the services that you guys provide is the actual exchange. So the DST exchange, you also, did you say that you guys are the intermediary for the 10 31.

Trevor:[00:40:57]We are not the intermediary, but we are 10 31 exchange specialists. So we kind of quarterback the team that helps the client through the exchange. We always have to have a QI, so there will always be an intermediary, but also with the client’s CPA and attorney or other financial advisors. We kind of quarterback the exchange as the specialists in 10 31’s along with those other team members and advisors. And, then we support the investment. Our expertise is in understanding the real estate that is within the DST. And supplying the client with DST options that are available. So, at any one time, we may have 15 to 25 different DSTs that are still actively available and through a series of conversations with the client to better understand their investment objectives, their cashflow needs, their property type, or geographic preferences. We will make a recommendation on what DSTs they should consider. So, that’s really our core service is helping that client, to educate on DSTs as well as complete the investment in the DST.

Tim:[00:42:15]And when you say helping them understand. The real estate, we’re talking due diligence on the operator, on the sponsor, on the debt, on the cash flow expectations. And so, I mean, with DST, are we thinking, hey, these are properties that are, you know, the client wants high growth, or is it more of a steady income combination of both? What do you typically see?

Trevor:[00:42:40]Yeah, these are generally speaking, going to, prioritize a predictable cash flow. I have a lot of clients that will come to me and say, oh, I’m investing in A DST ’cause they’re safer and that’s not the right word to use ’cause this is still real estate. You’re still subject to the same risks as any real estate owner is subject to, but these are generally going to include properties that have a full stabilized rent roll. So if it’s a multifamily property with, as an example, 250 units. We’re gonna see 90 plus percent occupancy on the day that we buy it. It’s generally gonna be a newer vintage asset, meaning it was maybe bought directly from the developer.

[00:43:23]And the reason the DST operators prefer that is because it allows us to be a little more predictable with what our repair costs will be or what the necessary improvements to the property will be. If we buy an older vintage asset, we have to account for those costs and we have to raise a little more money upfront in order to accommodate those repairs. So we see these as more predictable. Cash flow payers. They’re stable assets. It generally produces monthly income. That’s how most of these properties are designed but, if a client does prefer something with more growth we might look to on occasion, we’ll have options that will come up where there’s a light value add strategy in place where the sponsor company or the operator intends to refresh the kitchens.

[00:44:18]For example, maybe it’s a 15-year-old property and they’ve found if they put new granite countertops and paint the cabinets in the kitchen, that they can increase rents on that unit by $70 a month but, as most people know, commercial real estate is always, valued based on its cash flow. So if we increase the cash flow, we increase the value of the property. There of course, are extraneous market factors but as an owner, the lever we have to pull to increase value, is to drive higher cash flow. So, that’s the goal, some of these DSTs the strategy that may be in place is that of a light value add, and that would be for the client that wants a little more growth. We would, through those conversations, look to uncover what the client’s investment objectives are and match them with that style of investment.

Tim:[00:45:11]So primarily we’re thinking about steady cash flows, you know, expected cash flows, but there could be a growth option. Tell me, is this a DST opportunity? Is it open to accredited investors as well as non-accredited investors, or is it just accredited?

Trevor:[00:45:29]Good question. So it is private placement. So the SEC mandates, the investors and DSTs are accredited. And the accreditation standard requires us to meet either a net worth or an income. We don’t have to meet both, but if we meet the net worth, we can do that through a million dollars of net

worth, excluding the equity in your primary residence. The income requirement is $200,000 of income for the previous two years with an expectation that will continue or 300,000 if we’re married. So if we meet either the income or the net worth standard, we are accredited. And what we find is typically real estate owners maybe without even realizing it, will have met one of those two standards.

Tim:[00:46:18]Yeah. Okay. So where can listeners find more about your practice and what you do and the DSTs that are available to through your service?

Trevor:[00:46:31]Yeah, the first stop they can make is my website, so www.aimpointinvest.com. That’s AimPoint, A-I-M-P-O-I-N-T invest.com. I’ve got some good resources on my website on the 10 31 Exchange, as well as DSTs Qualified Opportunity Zones and other real estate investments. So it’s a good place to start your learning. I also have some downloadable tools, an exchange estimator and some other materials you can download. And then in terms of finding the specific property, we can’t advertise the investments. They’re not available for public consumption. So, we would start with a conversation with the client to understand first, confirm that they meet the accreditation standard, but then walk through the client’s exchange situation.

[00:47:25]Maybe make some suggestions about how they structure the exchange, but ultimately. When it comes to selecting DST options, I will present DST options following that conversation. And we’ve got all the material on the, on the property that we can supply the clients. Some, some exchangers want to get really, and, and I assume that my fellow pilots are in this category. They want to get really detailed. So we’ve got appraisal reports, we’ve got property condition assessments, we’ve got phase one environmental reports, we’ve got sponsor financial projections, and then we’ve got of course some sponsor track record information to evaluate the sponsors previous returns they’ve achieved with other DST investments. So we’ve got all that information at our fingertips to supply the, the client as they make their evaluation.

Tim:[00:48:19]Well, this has been great. It’s been very informative. I mean, honestly, for the folks who have been managing their own properties and they’re saying, wow, you know what? This has been, the appreciation has been great. But, the management has been a thorn in my side. I’d like to do something different. This certainly sounds like an option for them. So Trevor Flore with AimPoint Investments. Thank you so much for coming on Pilot’s portfolio.

Trevor: Thank you so much, Tim, for having me. It was great chatting with you.

Tim:[00:48:50]And that is going to bring us to the debrief section, so number one, look if you have a property that you are ready to sell because you are just sick and tired of managing it yourself, and you’d like to spend your time elsewhere. But you’re concerned about the capital gains because of lose, because in many parts of the country real estate has done well over the past decade and a half. But there are options for you. The DST could be something that you look at, there are other options to defer those gains until it makes sense to introduce them into your financial situations. That’s number one, you got options, you are not stuck. Let’s say that you have already identified, maybe you’re gonna do a 10-31. You’ve already identified the property that you expect to buy.

[00:49:36]Point number is to just have a back up plan. Just because you’ve already identified something, a DST could be a nice back up plan just in case the deal falls apart. Like, if you put it up as a back up plan, you don’t have to use it. And we’re all pilots, we all like redundancies. So have a back up plan And then number three, third thing I want you to think about is what’s important to you? Right, there are all these strategies out there, there’s all these tools. But life isn’t always about deferring a capital gain. At some point you might want to enjoy the money that is accumulated and appreciated in your real estate asset. Maybe you wanna tap into it, right. Sometimes selling it makes more sense for your financial situation. We just worked with a client on this huge capital gains. Sold a property in an extremely desirable part of the country. And had owned it for a long time, fully paid off. And said hey, you know what, we think that having access and equity is best for us right now. So of course we work with the CPA, we measured twice, cut once. And they feel really good about that, about their decision. So just make sure that you know what’s important to you. Because this is your life to live, you got one shot at it. Do what makes sense for you and your family. So that’s gonna wrap up the debrief section. Looking forward to hearing the emails that you guys put in about the potential changes to the show. Email us your questions you want answered and we’ll see you on the next episode.