Tired of endless 1031 exchanges? In this video, Origin Investments’ Mike O’Shea introduces the 721 exchange (UPREIT) strategy—a smarter, more flexible way to stay invested in real estate. Learn how it helps investors eliminate single-asset risk, avoid high fees, and build long-term wealth through the Origin IncomePlus Fund.
From 1031 to DST Investing
In recent years, a popular solution for 1031 exchanges has been investing in an interest in a Delaware statutory trust or a DST. DSTs essentially allow investors to pool their capital together and invest into an institutional-quality asset while also exchanging out of the day-to-day management. For traditional DSTs, the exit strategy for most investors is to continue to roll from a DST to another DST to another DST—every five to seven years when that asset sells, you would execute another 1031 exchange. And that’s known in the industry as a “swap till you drop.”
The Problem with “Swap Till You Drop”
While this has worked for some investors, at Origin, we looked at this exit strategy and saw a few challenges with it. Number one, when you use the traditional swap till you drop strategy, you have idiosyncratic or single-asset risk—you’re essentially rolling from a single asset to a single asset to a single asset for the rest of your life. And that’s a lot of eggs to have in one basket. Number two, it’s expensive. The DST industry is rife with high fees, and every time you sell a DST and roll into a new one, there’s a front-end load potentially of 10 to 15%. That can eat away at your net asset value. And finally, from an operational perspective, it makes things very difficult. What are the markets going to be like in five to seven years? Where will interest rates be? Is there going to be equity available? Are you going to like the DSTs that are available? Can you match your cash flow or your debt? It’s a lot of risk to put into somebody’s portfolio.
Introducing the 721 Exchange (UPREIT)
So, we utilize a strategy called a 721 exchange, or an UPREIT, that alleviates all of these problems. The beginning of a 721 exchange is exactly the same—you would sell your property and roll the proceeds into a Delaware statutory trust. In our instance, we invest in high-quality institutional apartment buildings in high-growth markets. Let’s say it’s a $100 million apartment building in Dallas, Texas. You would own that building for approximately two years. You’d get all the cash flow from it, and if it appreciated, you’d take advantage of that appreciation. You would write it off on your taxes through Schedule E just like normal.
But our exit strategy is different. We have a diversified flagship real estate fund called the IncomePlus Fund. After two years, the IncomePlus Fund would have the right to acquire that DST interest from you. Instead of giving you cash—which would necessitate another 1031 exchange—we would give you operating partnership units in the larger fund. That would be tax deferred under a different section of the tax code, Section 721, or what some people call an UPREIT.
From DST to Diversified Real Estate Fund
Now you go from owning a single asset in a DST into a broadly diversified portfolio. You can think of it like this: instead of owning a single stock, now you own a mutual fund. We’re de-risking the portfolio by adding diversification. The 721 also requires no more swapping—you stay in that fund indefinitely. And we believe at Origin that one of the best paths to wealth is to stay invested in risk assets for the very long term without the frictional costs of taxes and fees. By staying in that investment longer, just like Charlie Munger says, “The first rule of compounding is to never interrupt it unnecessarily.” This helps you build your wealth in a tax-efficient manner and pass it on to your beneficiaries in a very easily divisible security with a fully stepped-up cost basis and no burden of management.
Estate Planning and Legacy Benefits
Real estate can create unique challenges when it comes to estate planning, as it requires active management. Compared to other assets in your portfolio that you can easily pass on to your beneficiaries, real estate raises questions: who will manage this asset when I’m gone? Will my beneficiaries be able—or want—to manage it? Will they fight over it? Many people continue to hold real estate solely to get that stepped-up cost basis. One of the unique solutions to this challenge is a 1031 exchange into a 721 UPREIT. As we explained earlier, your real estate portfolio is now allocated across a diversified portfolio of properties and invested in a security. It’s easily divisible among beneficiaries—no arguing or fighting over the interest. If one wants to sell, they can; if another wants to hold, they can. And they still get that fully stepped-up cost basis with no burden of management.
Why Origin’s IncomePlus Fund Is the Ideal Destination
Finally, take a look at the IncomePlus Fund. We think there are many benefits to making it the final destination for a 1031 exchange via 721 UPREIT. The IncomePlus Fund focuses 100% on multifamily, or apartment, investing in high-growth markets throughout the Sun Belt and the West. Multifamily has had the highest risk-adjusted return of any commercial real estate asset class over the last two decades. We don’t invest in office buildings, shopping centers, or industrial warehouses. The fund is also tactical—it allows us to build, buy, or lend depending on what’s offering the best return at that time.
For the long term, if you’re going to be in a fund, we really like the IncomePlus Fund because it’s multifamily-focused and offers a tactical strategy that allows us to pivot depending on different market environments. You can learn more about this and the IncomePlus Fund at our website, origininvestments.com, where you can book a call with me or anyone on my team.
Considering an exchange? Learn more about our low-fee Origin Exchange program.
