The coronavirus pandemic has several silver linings for DST 1031 exchangers. If you were caught short on time to execute a real estate sale or replacement purchase, you now have a longer grace period (up until July 15, 2020). When buying, the coronavirus dip in occupancy rates and rents means good deals can be found on DST 1031 properties.
If you are not quite ready to jump in feet first to the real estate market as the economy recovers, DST 1031 properties provide the opportunity to diversify risk across multiple high-grade properties.
Why invest in a DST 1031 portfolio?
A DST 1031 allows you to defer capital gains taxes by exchanging your property for an investment in a similar property. If you were about to sell your property or were in escrow prior to the global pandemic lockdown, the market and buying conditions may have changed. The property you conducted due diligence on may no longer be available. Or the financing terms may no longer be attractive in the lower interest rate environment. In a changing property investment market, a DST 1031 portfolio diversifies risk across property type and cash flows.
Capital Growth Opportunities
As lower vacancy rates open a window, a number of real estate portfolios are on a buying spree. DST 1031s and other real estate investment trusts are locking in cheaper financing.
A few growth appreciation opportunities worth noting are:
Medical property portfolios — Medical real estate is recession-proof. Healthcare buildings and hospitals are getting a boost from government assistance to keep rents paid and thus cash flow to investors flowing.
Multi-family properties — The residential sector has experienced the lowest impact on occupancy rates and monthly rent payments. Demand is forecast to increase over the next year.
Warehouse facilities — International trade is boosting the demand for warehouse space.
A Good Time to Buy
The COVID-19 dip presents a classic value buying opportunity for real estate portfolios. Interest rates are low and loan-to-value requirements are being lowered.
Interest rates — The Federal Reserve has lowered the federal funds rate and rate for depository institutions. The goal is to encourage banks to provide cheaper financing.
Debt service coverage ratio (DCSR) — High-grade portfolios have more wriggle room to negotiate more attractive loan covenant terms.
Monthly distributions — Rental collections, which fell between March and May, are starting to rebound.
When it is time to sell, high-grade DST 1031 exchange properties have good future sales prospects. Liquidity opportunities include a sale, merger, or public listing. For portfolios being financed in the current more favorable environment, more upside potential is ahead.