Maximizing Wealth with DSTs & 1031 Exchanges with Kyle Shimoda

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Interview Transcription

ADRIENNE:
Welcome back, and thanks for listening to the Team Lally real estate show, home of the guaranteed sold program, or we’ll buy it. I’m Adrienne, and I’m Attilio, and if you have any questions, just give us a call at 7999596, or check us out online at Team Lally com.

ATTILIO:
Today’s guest was born in Oahu, grew up on Kauai. He graduated from Kauai High, studied marketing and finance at the University of Hawaii, earned a culinary arts certificate from Kapiolani Community College, and in 1999 he moved back to Oahu and built his career in finance as

ADRIENNE:
a wealth advisor at INPAC Wealth Solutions. He’s dedicated to helping clients reach financial goals and values the support of culture at impact. He loves traveling and exploring cuisines with his family. Please welcome back today’s guest, Kyle Shimoda, Hey,

ATTILIO:
Kyle, what you got for us? Or actually, we have a whole bunch of stuff for you. Yes, we’ve got a lot of questions. Yeah, so we get a lot of questions. So let’s get let’s get straight to it. First question. You ready? Sure? What is the DST? This is like Jeopardy. We’re in jeopardy style. We’re going Jeopardy south. What is a DST?

KYLE:
A DST? Well, it could be many things, but what I deal with and specialize in is the Delaware statutory trust that DST, yeah, okay. And one of the ways I met Adrienne was through a DST, many, many years ago. Yeah, actually,

ADRIENNE:
we met through initially, it was through PSI. And in the beginning of the show, we did a we talked a little bit about the psi, the basic and, yeah, I just felt like I had this major problem in my life and I was not going to be able to solve it. And I, thankfully, I met your wonderful wife, Lori, and she connected us. She said, My husband can solve this problem. Yeah,

ATTILIO:
so. Kyle, why don’t you refresh our memories? What was because this answers the next question, who is a DST for maybe can use Adrienne would be a great, great testament, live testimony, why this worked for her. Why did it work for her? Kyle,

KYLE:
yeah, he went, I think when? Well, maybe Adrienne can share more about the Wi Fi and the personal reasons being behind it. Yet, typically, a DST is for someone that is selling a property, normally highly appreciated, and the goal is to defer capital gains tax through a 1031, exchange. And DC qualifies as like kind replacement property. So you can sell a property, you know, like a single family home or apartment, and go into the other single family home or apartment, or you can look into DST, which allows you to be a fractional owner in a commercial, institutional grade property, and then it becomes a passive investment, versus one where you may have to be actively

ATTILIO:
involved, yeah, you know, you know, I think this would be a great part for Adrienne to dovetail. Yeah,

ADRIENNE:
the reason why it was so attractive to me is I had at that at that point, I had very bad credit, um, had you just gone through a bad divorce, and my I couldn’t qualify for a loan to do the 1031 exchange, and so I just thought, I’m gonna have to sell this property and just take a big, huge hit on taxes. I think I was looking at about $40,000 in taxes because of all the depreciation I had taken over 20 years owning, yeah, this property, and I was not happy about it. And when I found out that with doing this DST, it would still satisfy the requirement to have financing, because you got to replace the financing, yeah, but it was a non recourse loan, and I didn’t have to qualify for it. So that was the solution I was looking for. And I was so, so happy that, you know, I met Laurie and then Kyle and I mean, still, to this day, I still have that DST, and the money just keeps showing up in my account. Every month I do nothing. I’m just happy that it shows up. Yeah,

ATTILIO:
you sold the condo, did a 1031 exchange, bought into a DST, which was storage units over multi state area and and then you receive the growth, and you receive the income of investing in real estate without the headaches of the direct ownership, yes,

ADRIENNE:
and, or management. And, I mean, I always had a really great tenant in this little condo that I owned in Florida, yeah. And, you know, like, I made, like, a decent amount of passive income, yeah, but it, you know, like the tenant in place and having to do the updates, or the vacancies, refrigerators blow up, all that stuff. Yeah, I don’t have to deal with and the other thing is that I’m making a higher net return, yeah, with being involved in

ATTILIO:
this. DST, sounds like more money less headaches. Exactly, more money less headaches. I love it. Of Kyle talk more about the assets that DSTS are invested in. Maybe mentioned some brands or businesses that people would recognize.

KYLE:
Yeah. So the type of assets that would be in a DST would be office space, self storage, as Adrienne mentioned, there’s housing, life sciences, what else we have? There’s hospitality as well. Some of the brands could be well known, like Walmart. Many of the Walmarts used to be in DSTS. Many Amazon distribution centers are inside of DSTS and their own mind, people like you and I, yes, they have to be accredited though, they have to be accredited investors because there are minimums and there are some very specific risks. But typically, you know, many people that own investment property will normally qualify as an accredited investor or a CPU to confirm, I

ADRIENNE:
think that, like, um, specifically here in Hawaii because of our price points, yeah, that’s how you know. And then what, like, Tell us, what are those minimum requirements to be considered an accredited investor? Kyle, yeah,

KYLE:
an accredited investor is someone that has a million dollars or more of net worth, including their primary or a single individual earning 200,000 or more in income, or a married couple earning 300,000 or more, $300 Yeah, you mentioned if you own one investment property worth a million dollars, you know that’s not even counting for you. Could include your IRAs, your investment contract bank account, yet just your one property could qualify. Yeah,

ATTILIO:
credit, yep. So and with our price points, it’s not too hard to get to there. What’s the minimum investment required for a DST?

KYLE:
If you’re doing a 1031 exchange, it’s 100,000 so you’re selling an investment property, you’d have to exchange at least 100,000 get people that want to just deposit cash. They could do as low as 25,000

ADRIENNE:
Okay, and then let’s talk about the boot. I know that when we do that 1031, exchange, sometimes that property that you’re exchanging, or properties don’t exactly equal or are greater to the property that’s being sold. Can you explain the boot, and maybe that strategy that sometimes is used with the st, yeah,

KYLE:
yeah. So, so the boot, another way look at it, is the difference between what you’re selling, what you’re buying. So, yeah, if you were to sell, let’s call it a $200,000 property, and you find out another property for 150,000 they’re short 50,000 and you have to pay taxes on that. That that boot, or that difference, right? Boot comes into play is you, let’s say you have that $200,000 property that has a $50,000 mortgage on it. So you sell it, you you net 150,000 and you need to replace 200,000 in your next property. That’s where the food also comes into play. So you’d have to normally, either a come out of pocket that booth at 50,000 or go get another mortgage, so qualify for another 50,000 or in certain Delaware statutory trust that have debt attached to it, You can participate in the DDT sponsors debt, thereby satisfying that boot without having to qualify for it.

ATTILIO:
By the way. Do you know where the term boot came from, besides stuff you wear on your feet?

ADRIENNE:
Where? Where all

ATTILIO:
the English meaning of boot, which refers to something given in addition to when making an exchange to equalize the value. That’s why it’s called so anyway, because,

ADRIENNE:
and I want to also touch on this whole 1031, exchange, I know that it’s, I don’t think it’s on our list of questions, but we do talk about like, you know, having a just a foolproof way of making sure that your 1031 exchange does not fail. Yeah? And let’s, let’s just touch on that, because, I mean, it can be kind of stressful. You know, you’re selling your investment property, and there’s all these rules about identifying and then closing, and maybe you don’t find the right home or the right condo or investment and then there’s your stock with a couple days left. So how does

ATTILIO:
the did you explain it for? How to explain it? But how does

ADRIENNE:
the DST come into place? Kyle,

KYLE:
yeah, so, so anything, what you’re talking about is, when you’re looking to do a 10th of an exchange, you sell investment property, the IRS gives you 45 days to like to. To find an address or addresses, and 180 days to close, yes, yet in a tight market, or maybe looking for a specific type of place in property might be fine, might be hard to even get property access 45 days. And so a Delaware statutory trust, you know, we typically always have them in inventory. And so as long as the person can qualify as an accredited and then we have them in inventory, someone could call me on the 45th day. I don’t recommend that, but we had that happen in the past, and we’re able to give identify a property with an address, and then they can put that down on their identification form, and then we can close easily within the 180 days. Typically we can close in five to 10 business days.

ADRIENNE:
Yeah, so with this identification period, so maybe you’re under contract, and you decide, okay, this is not a good investment for me, like you want to have backup plans. So having the DST as a backup

ATTILIO:
is a good plan to have, because here’s what we do know, when you’re bought, when you’re selling a piece of property and then buying something close to each other at the same time, that’s like doing something that has a lot of moving parts and then doing it twice, all at the same time. So Kyle, if you If correct me, if I’m wrong, there’s three numbers you want to remember, 345 and 183 45 and 180 you got to identify three like kind properties within 45 days, and then you got to get the transaction done in 189 80 days. 345, 180 that’s also my PIN code for my NTm cart.

ADRIENNE:
All right, so it’s a good standard of practice to one of those three properties to have a DST, just in case, so that you’re not

ATTILIO:
stuck writing one big check to uncle Sam, yeah. Okay, so

ADRIENNE:
Kyle, how does a DST differ from owning real estate properties? What’s the big differences? So

ATTILIO:
single family home versus owning like kind, like kind commercial property in DST?

KYLE:
Well, a couple of differences, you know you’re going from maybe morning, yeah, that single family home with one tenant to like an agent’s case, she’s a fraction owner. And there’s 21 buildings across four different states, and there’s over 10,000 units,

ATTILIO:
1000 tenants. That’s diversification,

KYLE:
yeah. So you know, if there is a natural disaster right in one state, it does affect the portfolio, yet not like it might affect your one property. And boy, if you’re one and leaves in your one property, you’re you’re 100% vacant, versus, you know, if 1000 people left Adrienne units, it might affect the income, not by much, though. And then, yeah, just having the, you know, different market, different asset classes, appreciation may differ. And you know, I would say some of the other things big differences. Is, when you own your property in Hawaii, you can control what tenants in there, if you kick them out, if you sell the property, if you’re going to paint it, you have way more control. Versus in a DST, it’s completely passive. So these are not for everyone, you know, it’s not for people that like the active management. They’re looking to maybe flip or move and, yeah, just they like to maintain control. DST is a completely passive investment.

ATTILIO: 
Yeah, and passive is something that people really got to think about. Kyle, you know, just often a tangent, and I can go into it if you can discuss it, but I do know, like, here’s the one big tip that I always hear you talking about, is that people, they think, Oh, I got my single family home and my rent is $5,000 a month. But it’s like Paul Harvey on The Talk Talk radio guy back in the day, said, but well, what’s the rest of the story? And I think for you, the thing that you mention is net, net, net. Oh, and one more thing, net, like, after you back out everything, everything, let’s talk. Let’s talk about everything. What do you back out of the gross rent to get the net? Maybe we take turns. Nobody can repeat go Adrienne, mortgage, mortgage, general excise tax,

KYLE: 
insurance, insurance, property tax,

ATTILIO: 
property management fees,

KYLE: 
maintenance and upgrades,

ATTILIO: 
putting some aside for reserve for when the refrigerator blows up. Vacancies, vacancies, yeah, so once you you know. And then a couple of those are like, it just depends kind of situations. But what we call fixed expenses that you’re going to have every month is going to be your property taxes, your insurance, your mortgage. And so it’s net, net, net. And 5000 can really, can really quickly turn. Into a positive net, net, net of 1500 $2,000

ADRIENNE: 
so. And then Kyle will, you know, do those numbers and compare it to what you could get in a DST. And then, you know, you’re just truly an investor, and you want to look numbers to numbers Kyle will show you, you know, like a clear path, which is going to make the most sense? Yeah.

ATTILIO: 
If so, you know what the

ADRIENNE: 
let’s talk about this one, the retirement. Go ahead. Kyle, if someone’s planning for retirement, should they do a traditional IRA or a Roth IRA?

ATTILIO: 
Yeah. What’s the difference between the two?

KYLE: 
Ooh, that really depends. The difference between the two is a traditional IRA, similar to a 401, k or IRA. You put them in without paying any taxes. So you’re you’re deferring all the taxes on both what you put in and all the earnings, and when you withdraw it after 15 and a half, then you pay taxes on every single penny that went in there. Yeah,

ATTILIO: 
and good stuff here, Kyle, but before it’s like you went into in theater, then all of a sudden, they went to a different movie. I have a follow up

ADRIENNE: 
question, though, on these IRAs, because I know a lot of people have an IRA, not many people have the DST with these IRAs, they can also purchase property. Can these IRAs qualify to be an owner in the DST? Yeah,

ATTILIO: 
there’s the there’s the tie back, yes, yeah. Can you use your IRA? Yeah. Can you do this?

ADRIENNE: 
Because I know we have, we actually have a client that is owns a property in his IRA, and that was our with the

ATTILIO: 
self directed IRA. Yeah, self directed IRA, what can self directed? IRAs? Buy one. DST.

KYLE: 
They could self directed. Ira can buy any type of investment. Yet, I think people should look at the pros and cons of earning certain asset classes in certain types of holding vehicles, right? There’s a lot of benefits to owning real estate personally, in your name or in your trust, versus owning it in an upgrade, you get some advantages up front, but you lose some advantages in the back end, like a step up in basis, yeah, and things like so you really have to weigh the pros and cons.

ATTILIO: 
Well, I think we’ll table the IRA and all that stuff for the next show. And this circle should be kind of complicated. Let’s make sure before we go open up that Pandora’s box and we don’t have another hour and a half for our real estate show, why don’t we really stick a fork in it and make sure on the DST, you know, talk more about the DSTS. How about any I mean, just talking about people that have come to you, I know there was a lady. Her name was Lally. That’s not her real name. I changed it, and we met her at one of you guys events. And one of the things that struck me with what she said is that if she had known she had investing in real estate her whole life. And what she told me was that if she had known about like the and she was a she was a DST addict. She did, like, I don’t know one with you, and then she did, like, four

ADRIENNE: 
more or something. I gotta just DST all of my homes. Like, this is amazing. But I think what

ATTILIO: 
she said was that I should have, if I known about this way back in the day, I would have just done this long time ago and done it to all my properties instead of holding on to actual real estate. Um, talk about when people like, what does it look like? I’m gonna call you up and I go, Hey, Kyle, I got six houses over here on Oahu. I tired of replacing blown up refrigerators and dealing with stock toilets on the weekend. What would be besides the headaches, what is the process that you go through to give them that comparative knowledge so that they can make a

KYLE: 
decision? Yes, you should ask them, okay, well, how many properties? When do they buy it? How much they buy it for? Do they do any capital improvements? So I can figure out, like, what their cost basis is, yeah, age of the property. So I can figure out if they’ve taken depreciation, and then hopefully their realtor is involved? Yeah, they can give me an idea, yeah, like, like, Team Lally and, yeah, give me an

ATTILIO: 
idea on and I don’t

KYLE: 
know, and looking for, okay, now what’s your girlfriend? Yeah, minus all those expenses we mentioned, what’s the net? So, non comparing Kate, what is the return on investment? Then I do the comparison, okay, based on the DS season inventory, is there anything that could give them potentially higher income, yeah, and higher appreciation in the long run?

ATTILIO: 
Yeah, more income, more growth. And you just comparing a to b, and whichever one is better, you should do.

ADRIENNE: 
The other thing that we did not mention, I guess I’d like to mention it, because we’re talking about, like, depreciation and these tax write offs by owning, you know, the real property, you also get similar tax benefits by owning a DST. I. You get that on your your statements, and you send it to your CPA, and you get to do those depreciations, and if they do a cost segregation, you also get, you know, take advantage of all those other tax benefits of owning commercial property. You know,

ATTILIO: 
Kyle DSTS are like going to a happy hour having seven drinks, and then the next morning you don’t have a hangover. Owning property directly, you gonna have hangover because of all the problems and stuff like that. The last thing, we only have a couple minutes. But if you can do it in a minute or two, talk about there’s two, two succession plans that everybody has for real estate. And your kids, if they rot in, you’re gonna leave them to the Humane Society the property, if they’re not rot in and you keeping them in the wheel, what is the benefit of leaving them a DST, one or two? Three benefits of leaving them a DST versus one town home in Aina Haina,

KYLE: 
well, you know, the leaving the property, you know, in Aina Haina, yeah, we kind of look at it typically, if someone has three kids, yeah, right. More or less, they kind of fall into what a one or three categories is. One wants to maybe keep the property they know it’s a good investment, or maybe they have an attachment to the property or the family home. Yeah, they want to change any income and they’re willing to manage it, yeah. The second one just wants to sell it and cash out, right? And the third one wants to live there or is already living there.

ATTILIO: 
So no consensus. That’s it. No consensus. I will tell you firsthand. We see this all the time when we go for cell phone property, no consensus. What’s another one? So with, with a DST, each individual child can do whatever they like.

KYLE: 
Yeah. So the when someone passes away, yeah, they’ll get the step up into assist very same as any other real estate investment. And then each child can decide what to do with their fractional ownership in that DSP. So the first one could say, you know, I’m just gonna hold on to the DSC shares that mom or dad left me. I’m gonna keep collecting income, use that to do whatever I want. Child number two can save. I’m just gonna wait till the DST sales. I’m gonna take all those proceeds and buy my own place or whatever I want with the money, the only child that maybe is on luck is the one that was planning to live somewhere, yeah, rent free because they’re not able to go move into a DST however, they could continue to keep that income and pay their rent or their mortgage, or they can cash out and buy something so

ADRIENNE: 
and it sounds like a win, win. Yeah.

ATTILIO: 
And Kyle, I will tell you firsthand, the sibling that wants to stay and live in it never, ever, ever, ever, in the 20 years we’ve been doing this, can afford to buy all the other siblings. We’ve never seen it, so Haley’s comment and siblings buying out the other ones, one since every 75 years, maybe we’ll see it. Well, we’re coming to an end of another show. Yes.

ADRIENNE: 
And for our listeners that want to find out more about the DST, go to Team lally.com forward slash. DST, yeah. All right

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