While commercial real estate has traditionally been an investment class available to only very large investment firms and elite individual investors, the Delaware Statutory Trust structure allows investors to access the best DST commercial real estate investments in fractional shares, giving smaller investors the opportunity to access real estate investments that would otherwise be out of reach for most individuals.
Still, the question that is often asked by Cove Capital investments clients is what are the best DST investments? While this question could be answered many ways by different real estate sponsor companies, Cove Capital believes that the best DST investments are those that are debt-free.
The Cove Capital Answer to What Are the Best DST Investments?
This emphasis on debt-free real estate is what sets Cove Capital apart and is a major point of differentiation from other real estate Delaware Statutory Trust sponsor firms who acquire investment grade real estate assets using leverage.
By acquiring real estate assets with zero leverage, Cove Capital is really removing a large amount of risk from the equation for 1031 exchange and direct cash investors. We believe that debt-free real estate investments make the best DST investments for several reasons. However, before we explain some specific reasons why debt free DST offerings can help investors reduce risk, let’s look at what exactly are some examples of debt free DST offerings.
Why Cove Capital Believes Debt-Free Real Estate Assets Make the Best DSTs
Here are some specific reasons why Cove Capital Investments believes that debt-free real estate assets can potentially benefit investors through reduced risk and therefore can be considered some of the best DST investments for investors.
Debt-Free Real Estate Reduces Overall Risk to Investors
The first and foremost of these reasons is that debt-free real estate investments reduce the overall risk profile for investors. While there is never any guarantees of profits or asset appreciation when it comes to real estate investments, by investing in debt-free DST assets, investors are removing all of the challenges associated with a lender and financing equations.
Debt-Free Real Estate Provides Investors Greater Flexibility
Another reason Cove Capital believes that debt-free real estate makes the best DST investments is because by removing the leverage component of real estate, investors have greater flexibility to hold through any potential market downturns, credit crunches, recessions, or even depressions. The Cove Capital team is comprised of a group of highly seasoned real estate professionals with hundreds of years combined experience, and one area that each member of this team has in common is their experience seeing – through the course of their careers- that the most successful investors are those that have the flexibility to hold through potential down markets. Debt-free real estate adds an additional layer of flexibility for investors.
Debt-Free Real Estate Helps Investors Avoid Cross Collateralization
One of the things lenders will often insist on from investors is the need to use multiple assets as collateral to secure a single loan. Called cross collateralization, this action allows the lender to lay claim to all the collateralized properties in the case of default. With debt-free real estate investments more and more retail investors are entering the world of commercial real estate investing.
Debt-Free Real Estate Eliminates the Risk of Lender Cash Flow Sweeps
One of the unrecognized risks of leveraged real estate offerings for 1031 exchange investors is a cash flow sweep from the lender. Cash flow sweeps or sometimes called “cash traps” can be triggered by a number of situations at the property level. This could include a tenant having their credit rating downgraded, drop in occupancy levels, or overall performance issue at the property. All of these scenarios could potentially allow the lender to sweep all excess cash flow. Many investors are not aware that these cash flow sweep risks are included somewhere in the loan documents. Debt-free DST 1031 exchange real estate has no lender and therefore no risk of cash flow sweeps.
Debt-Free DST Real Estate Offerings Can Potentially Provide Higher Cash Flow
One of the things that Cove Capital is seeing in today’s higher interest environments is that some of debt-free real estate offerings have a higher projected cash flow than leveraged DST investments because there is no monthly debt service that needs to be paid to a lender. Debt-Free Real Estate Offerings Have No Balloon Mortgage Maturity Payment
Most leveraged DST properties have a balloon mortgage maturity attached with the loan. The balloon mortgage is a hard maturity date. That means if you don’t sell the property by that date or pay back the loan, then the lender will seek to take back the property through a foreclosure or other mechanism. Debt-free DST properties don’t have balloon mortgage maturity payment risks associated them.