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May 23, 2024 | read

119. Types of Economic Recoveries and the Pros and Cons of Investing 1031 Proceeds in DSTs with Paul Moore

Ben Isley

Paul Moore is a real estate investor and syndicator. He sold a business in the 90s and focused more on investing, such as flipping and investing in a subdivision. After trying a few different asset classes, Paul began investing more heavily in multifamily. Over the last several years, as multifamily has been heating up, Paul has been moving more towards self-storage and mobile home parks.

Different Types Recoveries

A V-Shaped Recovery is unlikely to occur. Wall Street is doing great, what about Main Street? Many jobs that were temporarily paused during COVID may never come back. A bathtub-shaped recovery may be more likely, more of a ‘U’ shape. Another possibility is a ‘W’-shaped recovery, where we see a recovery based on optimism, but it’s followed by another drop. A fourth type is an ‘L’ shape, dropping down and crawling along low, like Japan in the 90s.

Paul doesn’t feel convinced that a V shaped recovery should be relied upon or is likely. Investors with cash are sitting on their hands, waiting. It’s unclear how the government support could turn sour when it comes due.

“I’m just suspicious that this is sort of a false recovery that we’re seeing now.”

How are Wellings Capital Funds Designed?

Paul and his team looked for asset types that didn’t have a ton of institutional-type operators. Paul still loves multifamily, but many companies have come in with aggressive value add and moved on. A true 1980 vintage with major value-add is tough to find. This is not the case with mobile home parks – many are owned by mom and pop owners. They don’t have the resources, desire, or knowledge to raise the value of the park.

Paul and the team at Wellings Capital was made frustrated over the last few years by a string of investors they couldn’t serve, investors coming in with 1031 proceeds. One investor in particular had over $2MM in 1031 proceeds and Paul couldn’t take him on. This investor came back and mentioned that he moved the proceeds to a DST. At this point, Paul decided to set up a DST – Invest Direct Self-Storage.

Why DSTs?

A DST is an ownership model that creates a legal entity that allows the fractional investment of 1031 exchange funds to professional management. Like any other fund or syndication, you’re locked in for the duration of the investment. Instead of identifying their own replacement properties to manage them, 1031 investors can turn the proceeds into a passive investment.

DSTs are typically stabilized properties. A big disadvantage is that there isn’t a ton of upside on the return or appreciation. Many investors have FOMO of missing out on the next great asset class, a DST may not be the vehicle for these people. DSTs are illiquid and don’t allow for investors to actively manage the property.

“DST operators want to be in the space of low risk, low potential return, and stability.”

Learn more about Paul and his work: https://www.wellingscapital.com/

Download Wellings Capital’s special reports on DSTs and their Income and Growth Funds from Dropbox.