Unleashing the Power of Passive Real Estate Investing

The phenomenon is known as the "Amazon Effect", and chances are you've heard about it more than once. This e-commerce behemoth has revolutionized virtually every aspect of our lives, transforming consumer attitudes towards shopping and product accessibility and drastically altering the global supply chain. For institutional investors, the Amazon Effect has significantly boosted the appeal of industrial properties in the commercial real estate market, with properties housing Amazon operations being particularly sought after.

Amazon: A Rapidly Expanding Player in the Commercial Real Estate Scene

Aerial view of Amazon distribution center in Toronto illustrating the potential for investment real estate and the benefits of tax deferral through a 1031 exchange

Amazon is witnessing one of the fastest expansions as a tenant. The company recently unveiled plans to establish 1,000 small delivery hubs near densely populated regions across the US to streamline product delivery to consumers. This rampant growth spurred by e-commerce giants like Amazon has led CBRE to forecast a surge in demand for an additional 1.5 billion square feet of industrial space within the next half-decade. This demand has positioned industrial distribution properties as some of the most coveted assets in the market.

Moreover, Amazon's relentless demand has prompted the company to consider alternative properties. Many market analysts anticipate that Amazon could repurpose defunct and unoccupied large-scale department stores into industrial distribution centers, further indicating the skyrocketing demand for such spaces.

Although investors have their sights set on the expansive e-commerce market, Amazon emerges as arguably the most coveted and creditworthy tenant for these properties. Property owners are eager to secure long-term triple net leases with Amazon, as they effectively mitigate operating costs for the owner. Similar to most industrial properties, Amazon operates facilities on triple net leases, under which they cover the majority of operating expenses, including common area maintenance charges, insurance, and property taxes.

This upward trend isn't exclusive to large institutional investors. Small and medium-sized investors also have the opportunity to strive to capitalize on the earnings potential of Amazon's industrial properties. They can do so through tax-deferred 1031 exchanges and passive real estate investment strategies, broadening their access to this burgeoning sector.

What Does Passive Real Estate Investing Entail?

Various financial investment products in cartons demonstrating diverse options for investment real estate and the power of tax deferral through a 1031 exchange

Passive investing denotes a scenario where an investor takes a non-active role in the management of the property or business. It spans a range of asset types, from equity assets such as stocks or mutual funds, to real estate assets including Real Estate Investment Trusts (REITs) or Delaware Statutory Trusts (DSTs). Within real estate, passive investment can occur directly or indirectly.

Direct Passive Real Estate Investment

While real estate is often seen as a passive income asset, anyone who's managed an apartment complex firsthand knows it can be quite the contrary. However, owners who delegate the day-to-day management, upkeep, and leasing of the property to professional property management firms, or commercial owners with tenants on triple-net leases (where tenants bear most operational costs), can enjoy a far more passive investment experience.

With this strategy, an investor's role is reduced to simply collecting potential income each month, while their involvement in the property's operation remains minimal.

Indirect Passive Real Estate Investment

Indirect passive real estate investing involves a completely hands-off approach. An investor can participate in various real estate equity vehicles, acquiring fractional ownership in an asset or portfolio of assets. Beyond the initial capital investment, the investor plays no part in managing the property but shares in any profits or income generated.

Potential Advantages of Passive Real Estate Investment in Commercial Real Estate

Passive real estate investing in commercial real estate has seen significant growth, and there are now more opportunities than ever to invest your capital in high-quality, hands-off equity vehicles. Commercial real estate not only offers the possibility of a steady income stream and robust appreciation potential, but these assets also typically have a high entry barrier and require substantial expertise for successful business strategy execution.

However, passive investing can unlock the financial and wealth-building potentials of commercial real estate assets, making it an attractive option for many investors.

Three Key Options for Passive Real Estate Investment

Nowadays, there are numerous ways to invest in real estate through equity vehicles. Some methods, such as crowdfunding or opportunity zone funds, are relatively new, while others, like Delaware Statutory Trusts, REITs, and real estate funds, are established and tested vehicles with widespread popularity.

Delaware Statutory Trust (DST)

A Delaware Statutory Trust (DST) is a business trust that owns and manages real estate property. A real estate firm, known as the DST sponsor, initially acquires a property using its own capital, structures the property within a DST, and subsequently introduces it to the market through an official offering.

Investors purchase a fractional or concurrent ownership stake in a high-quality, professionally managed asset and potentially receive monthly income corresponding to their share of ownership. Over the past decade, DSTs have gained popularity due to their eligibility as replacement properties in 1031 exchanges.

Real Estate Investment Trusts (REITs)

A Real Estate Investment Trust, or REIT, is a company that purchases, owns, and operates real estate assets. There are public and private REITs, as well as traded and non-traded REITs. Private non-traded REITs typically engage with institutional capital sources, whereas public traded and non-traded REITs are registered with the SEC.

Shares of these are either traded on public exchange markets or directly purchased from the issuer. Historically, they've provided attractive dividends averaging around 5%, which is considerably higher than the average stock dividend of 2%.

Real Estate Funds

Real estate funds present another option, acting as an alternative to investing directly in a single REIT. These funds, such as real estate interval funds, invest in a variety of REITs, offering investors enhanced diversification. Some real estate funds are traded on public exchange markets, while others can be directly purchased through the fund.

Contrary to DSTs and REITs, real estate funds do not distribute dividends or monthly income. Rather, they seek to generate value through appreciation, realized at the exit or sale of the investment.

Investing in Amazon via a 1031 Exchange DST Property

Thanks to these passive investment strategies, individual investors can tap into high-quality, institutional-grade assets - bringing us back full circle to the Amazon Effect. While these strategies aren't exclusively tied to Amazon, they provide an avenue for investors to attempt to capitalize on the thriving industrial market.

One such strategy worth considering is employing a 1031 Exchange with a Delaware Statutory Trust to own Amazon Net Lease properties as a 1031 replacement property. This approach combines the tax deferral advantages of a 1031 Exchange, the passive management benefits of a DST, and the consistent income potential offered by Amazon's industrial properties.

Understanding the Mechanics of a Delaware Statutory Trust

Since 2004, DST investments have been recognized as suitable replacement properties in a 1031 exchange. Even though this exchange allows owners to transition their business model from direct to fractional ownership, the fundamental principles of a 1031 exchange remain the same. Upon selling an asset, the seller has 45 days to identify a replacement property, in this case, one or more DSTs.

The identified replacement property must comply with one of the three permissible identification methods: the 3-property rule, 200% rule, or 95% rule. The transaction must be completed within 180 days from the original property sale date. Similar to a conventional exchange, investors can defer capital gains taxes through this process.

Numerous reliable DST investments are available from trusted sponsors with a proven track record. DST sponsors undertake the task of structuring the trust, which encompasses property inspection, due diligence, securing debt if required, and organizing the DST offering in accordance with SEC regulations. All these costs are included in the official offering.

When considering properties occupied by Amazon, investors should look out for industrial DST offerings. Due to SEC regulations, DST sponsors are prohibited from publicly advertising certain offerings. To locate an offering that aligns with your objectives, it's advisable to conduct thorough research on reputable sponsors and consult with a licensed 1031 Exchange professional.

Pros & Cons of Delaware Statutory Trusts

Investing in a DST via a tax-deferred 1031 exchange offers the potential for significant benefits. Shifting away from direct ownership alleviates the responsibilities associated with daily property management. Plus, DSTs generally have low minimum investment requirements – typically $100,000 – which allows investors to spread their investment across multiple DST properties and diversify their portfolio.

As DST investments are usually comprised of institutional-grade assets, such as an Amazon net leased property, they potentially provide higher monthly income and appreciation compared to direct ownership – although this largely depends on the specific asset.

However, as with any investment, there are also drawbacks. Two of the risks associated with DSTs relate to liquidity constraints and the timing of exits. DST properties are usually held for a period ranging from 3 to 10 years, and early exits are generally not feasible.

While the hands-off management nature of a DST is one of its attractive features, it also implies that investors do not have a say in management decisions. Therefore, it's critical to select a robust sponsor with a demonstrated successful history when investing in DST real estate.

Leveraged DST properties also present a risk. High leverage – say 80% – can notably decrease monthly cash flow as the majority of profits will be allocated towards servicing the asset's debt. Most DSTs apply leverage between 50% - 58% to avoid undue risk. Consequently, when considering a DST property, thorough due diligence is essential prior to investing.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

How To Build a Diversified Real Estate Portfolio

Creating a diversified real estate portfolio involves similar principles to building a diversified stock portfolio, including selecting assets with low historical correlations and diversifying across various assets to manage overall risk. It's crucial to consider more than just geographical location, cap rates, building classes, and vacancy rates. Other real estate asset classes, as well as tax implications and liquidity concerns, should also be taken into account.

Achieving Diversification Across Asset Classes

Diversification is an important concept for any investment portfolio, and this is especially true for real estate investments. A diversified portfolio helps to manage overall portfolio risk and can potentially provide greater returns over the long term.

When it comes to real estate investing, many people automatically think of owning physical property. However, this is just one of many asset classes that investors can consider. By diversifying across different asset classes, investors can spread their risk and potentially increase the chances of achieving a successful investment outcome.

Real property is the most traditional form of real estate investing, and it involves owning a structure as an investment. Examples of real property include single-family homes, apartment buildings, and commercial properties. These assets may be able to provide a monthly income and potentially appreciate in value over time. When selecting real property investments, it is important to consider different locations and building classes to strive to help stabilize the monthly income stream.

However, investing in real property can require significant capital contributions, complex deal structures, and property management costs. For those who cannot afford to invest in physical property or for those who want to diversify further, there are other asset classes to consider.

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Real Estate Investment Trusts (REITs) come in both public and private forms. Private REITs are structured as funds, while public REITs are stocks. Unlike physical property investments, REITs are passive investments that are managed by a sponsor. REITs have the potential to pay dividends and appreciate in value.

Syndications, which are often referred to as crowdfunding. These deals are typically offered through websites, and investors can participate in a fund or a specific deal with a sponsor. Like REITs, syndications are also passive investments.

Both REITs and syndications can be further diversified by investing in either residential or commercial property. Commercial property, also known as Commercial Real Estate (CRE), can include office buildings, warehouses, storage facilities, and other commercial properties. Investing in different types of commercial properties can further diversify a real estate portfolio and help to mitigate risks.

Real property, REITs, and syndication deals can be structured in various ways, including debt and equity financing. Debt financing typically pays regular interest but does not allow investors to participate in the appreciation of the property. On the other hand, equity financing deals may not have regular payments but offer investors the opportunity to participate in the property's appreciation.

In addition to considering asset classes and deal structures, investors should also take liquidity into account.


It's important to consider liquidity, while real property can provide long-term value and appreciation, it may be illiquid, making it difficult to access funds quickly in case of an emergency. Publicly traded REITs, on the other hand, are generally more liquid.

Most syndication deals are not liquid, but they often have a known exit strategy, such as selling the property and returning funds to investors. By staggering these exits and diversifying across different asset classes and deal structures, investors can create some liquidity within their real estate portfolio.

Additionally, it's important to consider the type of deal structure when thinking about generating cash flow. Real property rentals, REITs, and syndications with a debt structure generally provide the potential for regular cash flows, whereas equity-only deals may not provide any cash flow. Taking these factors into account can help investors build a well-diversified and liquid real estate portfolio that targets their financial goals.

Tax Implications

Tax implications are an important consideration when building a real estate portfolio, as each asset class offers different advantages and implications. Real property may be the most complex in terms of taxes, but it also offers the most benefits. For example, real property investors can save on taxes through interest on loan payments and depreciation, which is a non-cash flow deduction.

REITs and syndications do not offer the same deductions as real property. REITs pay dividends, which may be taxed at a lower or ordinary tax rate depending on the type of dividend. Debt deals that pay interest are taxed at the ordinary tax rate, while equity deals that provide distributions are also typically taxed at the ordinary tax rate.

The tax implications of a real estate portfolio can be complex, so it is best to consult a real estate tax advisor when structuring such a portfolio.

When it comes to building a real estate portfolio, it's not just about what assets to buy, but how to create a portfolio that balances risk and returns. Even assets in the same asset class can have different risk and return profiles, depending on the specific deal. By pursuing a mix of assets that meets your needs, you may be able to balance out the risks and returns of your portfolio.

It's also important to consider that your real estate portfolio is just one part of your larger investment portfolio, which may include stocks, jewelry, collectibles, and more. If your real estate investments are causing your overall portfolio to become more volatile or putting your other assets at risk, that is something to be aware of and factor into your decision-making process. A well-diversified portfolio is key to achieving long-term financial success.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Real Estate Risk Disclosure:

Investing in a REIT vs. a DST

Today’s investors have started turning to real estate investment trusts (REIT) and Delaware Statutory Trusts (DST) as alternatives to real estate investing. Each option offers a unique opportunity to enjoy the benefits of owning real estate – without the hassle of managing the property.

Although both options are considered real estate investment alternatives, they differ in specific ways. Investors who are currently or considering investing in one of these alternatives should understand the differences, the tax implications, and the potential impact on their investment portfolio.

Real Estate Investment Trusts (REIT)

“A real estate investment trust, or REIT, is a corporation that owns and/or manages income-producing commercial real estate. When individuals buy a real estate investment trust share, they are purchasing a share of the company that owns and manages the rental property.” This is known as an equity REIT.

“Most [equity REITs] focus on a specific product type (e.g., retail, hospitality, multifamily housing, senior living facilities, student housing, office space, self-storage, industrial, and so on) or geography (e.g., commercial real estate in the Northeast vs. Southwest).”

In addition to equity REITs, which invest in and manage income-producing property, are mortgage REITs and hybrid REITs. A mortgage REIT holds a mortgage on real property, while a hybrid REIT holds mortgages and owns property.

To be considered a REIT, a company must follow strict guidelines. The REIT must be an entity that is taxable as a corporation and must be managed by a board of directors or trustees. It must invest at least 75 percent of total assets in real estate, cash, or U.S. Treasuries, and derive at least 75 percent of gross income from rent or real estate sales. Mortgage REITs derive income from interest on mortgages that finance real property.


After its first year of existence, the company must have at least 100 shareholders, and five or fewer individuals must hold no more than 50 percent of its shares.

Companies that file as REITs can avoid triple taxation by distributing at least 90 percent of their taxable income to shareholders, which results only in double taxation. The 10 percent not distributed to investors can be reinvested to acquire new properties for the portfolio.

Types of REITs

REITs can be publicly traded, non-traded, or private. The first two – publicly traded and non-traded – must register with the Securities and Exchange Commission (SEC). The major difference between these two is that publicly traded REITs are listed on a national securities exchange, offering retail investors direct access to trades. In contrast, non-traded REITS are not—investors looking for an investment that is not typically subject to stock market fluctuations generally select non-traded REITs.

Private REITs, on the other hand, are not registered with the SEC and are not publicly traded. These REITs are generally restricted to institutional investors.

Delaware Statutory Trusts (DST)

“A Delaware Statutory Trust, or DST, is a legally recognized real estate investment trust in which investors can purchase ownership interest. Investors who own fractional ownership are known as beneficiaries of the trust – they are considered passive investors.” The trust is initially created by a sponsor, who is responsible for identifying and acquiring the various real estate assets. The DST sponsor is generally a professional real estate individual or company.

“Properties held in DSTs that are considered ‘like-kind’ include retail assets, multifamily properties, self-storage facilities, medical offices, and other types of commercial real estate.”

As investors contribute to the DST, their capital replaces the initial capital used by the DST sponsor until the investors become the owners of the real estate. Unlike a REIT, where investors own a share in the company, a DST offers them direct real estate ownership.

Holding Period and Exit Strategy

Both non-traded REITs and DSTs generally require investors to hold the asset for a minimum of five years. Investors looking to liquidate prior to this may incur difficulty or additional fees.

Non-traded REITs, for example, often allow investors to sell back shares at select intervals after the second year; however, investors who select this option tend to receive only a portion of their initial investment in return. To attempt to maximize returns on REITs, it can be best to wait until the REIT changes – via a merger, outright sale, or listing (goes public).

Since DSTs offer fractional ownership, those who invest in these trusts can only liquidate their portion by selling their fractional ownership themselves or when the DST sponsor sells the asset, historically after 5-7 years. If the investor wishes to sell their share themselves prior to a sale of the property by the DST sponsor, they should understand that there is no secondary market for these trades; rather, investors usually work with a qualified professional to attempt to help identify a suitable buyer.

Generally speaking, to seek to maximize returns on DSTs, it can be best to wait until the DST has reached full cycle, meaning it has been sold on behalf of investors by the DST sponsor. At that time, investors can opt to cash out and receive any returns from their investment or trade via a 1031 exchange.

It’s important to note that there are alternative exit strategies for a DST, although the aforementioned is the most common. For example, in some circumstances, an investor could utilize a section 721 exchange to trade fractional ownership in a DST for shares in a REIT, allowing the investor to defer capital gains.


Tax Advantages of REITs vs. DSTs

All income generated from REITs and DSTs is taxable. However, each investment is taxable in different ways.

Tax Treatment of REITs

Dividends received from REITs – which are usually paid monthly or quarterly – are taxed at different rates depending on how the income is categorized. Most dividends paid come from a REIT’s taxable income. Therefore, investors are taxed at their marginal tax rate. When a property in the portfolio is sold, however, an investor may receive capital gains distributions, which incur preferential tax rates since they are treated as capital gains.

Another way investors can receive distributions is related to return of capital – this includes distributions that exceed a REIT’s profits. Investors are not immediately taxed on this income; taxes are deferred until the investor sells their shares.

Distributions are categorized on a standard 1099 form, which every investor receives from the REIT for tax purposes.

Additionally, per the 2017 Tax Cuts and Jobs Act, REIT investors can also claim a 20 percent deduction on pass-through income until the end of 2025. This allows investors to deduct 20 percent of taxable REIT dividend income, excluding anything that qualifies for the capital gains rate.

Tax Treatment of DSTs

Like a REIT, income from DST dividends is taxed as ordinary income. Therefore, investors are taxed at their marginal tax rate. Fractional owners receive a 1099 form that outlines their pro-rata ownership of income and expenses from the DST assets.

Since DST investors are real estate owners, they can also benefit from depreciation, unlike REIT shareholders. Additional deductions may also be included.

Once the properties in the DST are sold, investors are responsible for paying capital gains. However, DSTs are unique in that they qualify for a 1031 exchange. A 1031 exchange, or a “like-kind” exchange, “represents a simple, strategic method for selling one property and exchanging it for one or more like-kind properties within a specific time frame.

The Internal Revenue Service [IRS] allows an investment property owner to exchange the real estate on a tax-deferred basis. In other words, investors defer paying capital gains through a 1031 exchange, which often equals 20 to 30 percent of their gains.”

Any investor considering selling their shares in a REIT or their ownership in a DST should consult with a certified public accountant (CPA) to understand the full tax implications.

Where to invest: A REIT or a DST?

Investments in REITs and DSTs provide individuals access to unique real estate opportunities. Those looking to replace existing real estate via a 1031 exchange should consider investing in a DST, whereas those looking to place cash have the flexibility to select from the two.

To better understand which options are best suited for your investment strategy, you should speak with a qualified professional about current investment opportunities.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

·      There’s no guarantee any strategy will be successful or achieve investment objectives;

·      All real estate investments have the potential to lose value during the life of the investments;

·      The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

·      All financed real estate investments have potential for foreclosure;

·      These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

·      If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

·      Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits