Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon, or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. David, thanks for being here.

Yes. Happy to be here. Thank you.

So David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to 913-363-1234. That's 913-363-1234, or email them to hey mike@howtoretyme.com. Let's begin.

Hey, Mike. What's the difference between a DST and a REIT, an r e I t?

Yeah. REIT is a real estate investment trust. So think of it as kind it's a trust, but think of it as kind of like an LLC or a business. You're buying shares or part ownership of a business here. DST, similar concept except for instead of owning part of a trust or part of a business, so to speak, you own fractional interest of the actual real estate.

And the reason why this is so important is if you're a landlord and you wanna sell and you don't wanna pay taxes, which many landlords don't wanna pay 30 percent or whatever. It's painful parting

with all that money. Right?

Yeah. You got a $1,000,000 property, you know, or $10,000,000 apartment complex, or maybe you got 3 or 4 houses and you sell it all. Chances are you've depreciated the asset to 0, which means 100% of what you sell is subject to gains or capital gains tax.

Okay.

So you end up in these horrible situations where you're paying, you know, a a lot of money in taxes, 25, 30 percent or so depending on where you live. That sucks. Yeah. Part of my French. My teen French.

Yeah. Right.

But it's not it's not a fun situation. And so a lot of people will hold on to the real estate properties because they don't wanna pay the taxes, and I get that. And so people will say, well, hey. We can do a 1031 exchange. That's where you sell your property.

You move the proceeds to a qualified intermediary. So you didn't touch any of the money. And then from the QI, they can send it to a DST. A DST qualifies for a 1031 because you're buying let's say it's, for simple math, an acre of the property, maybe bought 10% of the property. You with me so far?

Mhmm. Yeah.

A REIT, you're buying a part of a business doesn't qualify for 10.31 exchange. So if you were to sell your $1,000,000 real estate portfolio, for simple math, you would pay the taxes. And then what's left over, you could still be in real estate. It's just you had to pay the taxes. You couldn't move the money out of your current position, your current real estate portfolio, and put it into a REIT.

Doesn't qualify.

Okay. And the

reason why this is important is because there's no such thing as a perfect investment product or strategy. When we consider real estate parts of our portfolio, if you have real estate, actual real estate, you're a landlord, it may make more sense to sell your properties because you're just sick and tired of tenants, trash, and toilets, and you move the proceeds to a QI, and then you buy a couple of DSTs. So you maintain your cash flow. The asset appreciates in value. And when the DST becomes liquid, you know, in 5, 7, 10 years, whenever that time frame is, you then continue to roll it up.

So then your kids get it all tax free because when you pass, real estate gets a step up in basis. Basically, you don't pay taxes on the gains when you die.

Okay.

Yeah. That's why, there's a common expression, grandma, don't sell me your house. Give it to me when you die because you get it then tax free in some sense. You know, there's a property tax or some tax, but the gains. Okay.

Yeah. Yeah. Whereas a privately held REIT is more of saying, you know, I I just want a part of my portfolio be in real estate, but I want to be diversified. So you can look at REITs that specialize in I mean, you name it. The privately held REITs, in my opinion, are better than publicly traded REITs, because publicly traded REITs have to keep more cash on hand Mhmm.

In case you were to redeem your shares. You that you'd want you'd want to cash out. Privately held REITs have more money going to the assets. So you, in my opinion, again, have a in what I've seen, you've got a more competitive return. So it do appreciate some value.

You could also get a dividend from it or payment. So you just have to understand where's your money now and where are you trying to send it. Am I explaining that okay?

Yeah. I think I get that. Yeah.

So it's complicated. JPMorgan, a company most people have heard of, did a very interesting research project. What they found was instead of your typical portfolio of stocks and bonds, if you include around 30% of it in alternatives or real estate, you had better growth historically and lower volatility. Why is that? The stock market or equities is independent of the bond market, which is also independent of the real estate market.

Mhmm.

So you've diversified them. They can help each other when one is struggling and the other 2, hopefully, would pick up the slack. So it's kind of a nice thing that makes sense. So if you're not currently in real estate, maybe you want some REITs in your portfolio. Privately held REITs, which you can't get on your own.

You have to go through a licensed financial professional for the good ones. You gotta make sure that the proper due diligence is done before you buy them, and make sure you're working with a fiduciary that can't get a back end commission. Because many of these REITs pay a very fine commission to someone who has a series 7 broker dealer license. I don't have that.

So how does what explain a back end commission. Just how does that work?

Yeah. So, like, for example, DSTs. It's a a product that's commission based. K? So if I had a series 7 license, and I'm being really transparent right now.

If I had a series 7 license and I sold this one to DST, I get 5.6 commission or so as a kickback. Because it's an illiquid asset, they pay the person that brought the money in there, all as well. Because I can't get that commission, the client gets the commission.

Okay.

K? So instead of paying me that, it's just rolled up into the client's asset. Because I have a series 65 license. I cannot accept back end commissions. I can only charge for my time or fee for advice.

Okay.

And that was on purpose, by the way. I've had so many people say, why'd you do that? You're leaving money on the table because it's the right thing. And I got to build, look at, you know, the mirror

Yeah.

And look at myself. So with REITs, sometimes and I don't want to be accusatory.

Alright.

We need brokers and dealers to move money around. They have their place. But if you go through a fiduciary, as in a series 65 license, you cannot receive a back end commission. Maybe the due diligence is done a little bit differently. Maybe they're recommending a couple of different products because you're paying them for the hour or for the advice.

That back end incentive isn't really there. Now, I'm I'm probably oversimplifying this. There's a lot of complexity from compliance, but that's the idea, is that you're working with someone that can give some honest feedback about what would be the real estate component within your portfolio. How does it break down from a complexity standpoint? What's the liquidity of it?

What's the history of it? What what are the I mean, you gotta almost be like a CPA vetting these things because everyone wants to sell you something. You have to see through the marketing crap and get to the the real details, the nitty gritty. Yeah. Again, it's just there's no such thing as a perfect investment product or strategy.

Real estate can be a very competitive thing in your portfolio. You just gotta make sure you're you're going about it with your eyes wide open. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.

Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.