Demography Is Destiny (The Awesome Inevitability of DST)

By Robert Smith, President
Peregrine Private Capital Corporation

“Demography is destiny” is an oft used term when it comes to the economy.  Its exact origins are lost in the mists of time but it’s as applicable now as it was then.

Simply put, demography (births, deaths, disease, etc. anything which illustrates the changing structure of human populations) drives consumer demand.  Witness the outsized impact of baby boomers (heretofore the largest demographic group born in the U.S.) on:  sneakers, designer clothes, BMWs and McMansions.  It’s like a snake swallowing an egg.

Now the boomers are growing old.  As boomers age they will begin developing health problems.  In turn, this will force them into a more passive roll, both in the management of their daily lives and their assets.  This is particularly true where real property is concerned.  Unlike a stock or bond, real property requires active management.  Stuff happens.  Things need to be fixed.

This is all well and good when you’re in your 20s, 30s & 40s.  Not so good in your 60s, 70s & 80s.  Hence, the awesome inevitability of DSTs or Delaware Statutory Trust properties.  As truly passive income vehicles (that are also 1031 exchange compliant), DSTs satisfy a property owners need to transition out of active real estate management without the incumbent capital gains tax liability.  You are no longer responsible for the “Terrible Ts, tenants, trash and toilets.”  Your sole obligation is a monthly trip to the bank to collect your cash distribution.

Even though the industry is only 16 years old, DST properties currently comprise approximately 10% of all replacement properties in 1031 exchange nationally.  This growth is being driven by the graying of the population. Outside of government, this process is impossible to stop or prevent.  Just like aging, it is inexorable.

Real estate investors will not spend a lifetime avoiding capital gains tax via 1031 Exchange to simply throw in the towel at the end.  Logically, they will seek out an ownership format that better compliments their new, more relaxed life style.

They will find something very similar to what they already own, albeit remotely managed and truly passive.  Something that allows them to completely disengage from the day to day decision making process.  They will find the DST.  In so doing, they will no longer be swimming against the tide but riding the crest of the demographic wave.