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Traditional wealth management is very experienced at managing an investor’s portfolio of assets at a traditional brokerage account of stocks and bonds. But there’s a gap when it comes to portfolio management of real estate properties, and when to utilize 1031s and Opportunity Zones.
Drew Reynolds, CIO at Realized, joins the show to discuss how a portfolio of investment properties can be managed with the same level of sophistication as traditional investments.
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- An intro to the Realized platform, and how they expanded from 1031s to Opportunity Zones.
- How much wealth Americans have in investment properties.
- The 800-pound gorilla in the room — unrealized capital gains from investment properties and the huge tax implication.
- Risk quantification of different investment strategies and wrappers, including DSTs and Qualified Opportunity Funds.
- How advisors should consider working with DSTs and QOFs as part of a broader wealth preservation or wealth building strategy for their clients.
Guest: Drew Reynolds, Realized
About The Opportunity Zones & Private Equity Show
Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.
Jimmy: Welcome to “The Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson. How can investment properties be managed with the same level of sophistication as traditional wealth management? Joining me today to discuss this topic and more is Drew Reynolds, chief investment officer at Realized. Drew, great to see you. Thanks for coming on the show today.
Drew: Hey, thanks, Jimmy. Great to be here. Glad you were able to invite us, and glad we’re able to make it work out.
Jimmy: Yeah, great to connect. Drew, I’m sure that a lot of our audience of high-net-worth investors and advisors probably have heard of Realized, or have some level of familiarity with Realized. Some of them may even be on your platform, or have read a lot of the great educational content that your group pumps out on a regular basis. But for those who may not yet be familiar with Realized, can you give us a brief introduction to the firm and your role there?
Drew: Yeah, absolutely. And thank you for the compliment. We really do value that educational content. That is definitely where we lead. Sure. So, Realized provides investment property wealth management for individuals, either directly or in collaboration with their existing advisors or tax advisors. As you mentioned up front, or in the introduction, we believe that investment property wealth should be managed with the same tools and sophistication as traditional financial investments, such as stocks and bonds. And I think we’ll probably dig into that here a little bit. But big picture, it’s kind of crazy when you think about it that you’ve got two enormous industries, wealth management and real estate, that by and large do not talk to each other.
They just, for whatever reason, simply do not speak the same language. Real estate’s traditionally deal-driven and transactional. Wealth management’s typically planning and goal-based. But we think that the bigger reason that those groups typically have not talked to each other is that frankly, well, it’s easy to look at projected returns with investment property or real estate. Traditionally, it’s been very difficult to quantify risk. And if you think of any other asset class, if you can’t quantify risk, it does not fit into that wealth management framework. And Realized has really kind of married those two industries together by systematically quantifying risk, and then being able to really speak the same language of wealth management, and bring that into kind of the holistic wealth management process. We’ll dig into that in a second.
My role, specifically, is the chief investment officer, which means I do a lot of the… Well, we’ll talk about the risk quant stuff. I’ve had a heavy hand at that, really developing the structures and procedures that we’re gonna do to implement from the consumer-facing side. But also sourcing and evaluating deals on the other side, that, you know, the risk quant’s great, but really, it’s, as everybody knows, it really matters how good the inputs are that go into those portfolios, that makes a difference. So, kind of tasked with both of those.
Jimmy: Yeah, that’s great. I can’t wait to talk some risk quantification with you a little bit later in the episode.
Drew: Riveting cocktail conversations, for sure.
Jimmy: Yeah, maybe it’s a little bit geeky, but I’m into it, and I think our listeners will get a lot out of that conversation as well. But before we start talking about that, I wanna hear more about the history of Realized. You guys started, I think, as a 1031 exchange or DST platform to showcase different investment opportunities for 1031 or Delaware Statutory Trust investors. And then, at some point, you added Qualified Opportunity Zone investment offerings on your platform as well. When did that transition occur? When did you start adding Qualified Opportunity Funds and OZ deals to your platform?
Drew: Yeah. So, if I back up and kind of go from the inception, which is back in 2015, I was happy to be, or lucky, I should say, fortunate enough to meet up with our founder, David Whelan, right when the company was being launched. So, I think I’m employee one. David was a former DST sponsor. He was actually the sponsor behind what was the second DST that was ever done, back in 2004. So, it’s a space that he knew very well. I come from a pretty heavy structured finance background around real estate.
We both sort of had a shared vision. We both grew up in heavy real estate families, and I think this is a recurring theme here, is that our families just made their wealth in a different manner than a lot of America, which was heavy, hands-on, direct property. And when we get into that wealth management discussion, I think what we both recognized, especially as we had aging parents, is that here’s successful people that have a lot of their wealth that they’ve worked very hard for, and now all of a sudden they’re 70-something years old and they don’t have the same tools afforded to them as somebody who maybe had a pension fund, or a 401(k), or made their money in a more traditional way.
So, we started digging into it. One real interesting thing that we found is just the sheer enormity of the wealth factor that’s held in the United States. There is an estimated $6.4 trillion, that’s trillion with a T, of household wealth and investment properties in the U.S. And that is individuals. That’s not corporate or investment fund held. That’s individuals. That’s 12% of the U.S. population’s collective net worth. Most of that is held by that aging baby boomer demographic, which is at or nearing retirement. And so, the majority of these have also been held for a long period of time. And if you know anything about real estate, that means they’re probably fully depreciated assets, and that means that they’re staring at huge tax bills.
So, if they sold and wanted to also retire from the direct property business, would be facing an enormous erosion of their net worth right at the wrong time, right as they’re moving into retirement. And so, that’s really where the genesis of the investment property wealth management side came for that. Specific to DSTs or QOZs, and we’ll talk about the differences before, you gotta remember that both DSTs and QOZs are… They’re just legal wrappers that have certain attributes to them. At the end of the day, it’s all about what the underlying investment is, how that’s structured, whatnot.
So, I do wanna kinda leave investors with that message. A DST or a QOZ, on its own, doesn’t mean a whole lot. It’s a bit like asking a financial advisor, like, “Hey, how do you work with stocks and bonds in your portfolio?” Well, it’s a little more to it. But we use DSTs and QOZs simply as inputs, in the very similar manner as a traditional wealth manager. And that really depends on what the investor is hoping to achieve, their risk tolerance, time horizon, etc., etc. But we take a… Obviously, we do the due diligence behind the investments, but we’re fairly agnostic to the specific offerings, meaning we’re not pitching deals. We’re providing solutions based on what the investors are trying to achieve.
I think there’s another question that…sorry if I didn’t answer directly about when we got into QOZs. So, we started in DSTs, just to put the train back on course, we started on DSTs right out of the gate, in 2015, because of it was the space we understood, and it could help investors right out of the gates. We were very early adapters into the QOZ. We are kind of tax nerds around here. When the initial legislation came out, we actually stayed up all night and read the Jobs Act. And at the very back of it is, as you’re aware, Jimmy, there was a little section in there about this Qualified Opportunity Zones.
We then proceeded to buy up a whole bunch of URLs or websites around the concept. So, for instance, we bought… We own qualifiedopportunityzones.com, that I think we bought at about 4 o’clock in the morning the night the legislation came out. So, now, we’ve been following it for a very long time, and we’re definitely hoping that it gets extended. I think it’s another, from that wealth management perspective, just another powerful arrow to have in the quiver.
Jimmy: Yeah, I think that’s great. And by the way, that’s why my domain name is opportunitydb.com. Not a great domain name, but all the good ones were already taken by you, and some other groups too. I won’t blame you entirely for that, but that’s all good and fine now. So, you mentioned this trend of baby boomers at or nearing retirement, and they… A lot of them are seeking to get out of direct property management, but there’s just that huge tax burden there. There are some tools in the quiver for them to utilize a DST structure or a QOF, Qualified Opportunity Fund, wrapper.
And I think you’re exactly right to point out, they’re just wrappers. They don’t really mean anything. It’s kind of like, you said stocks and bonds. I might say it’s kinda like an ETF. So, if somebody asks you, “Hey, what do you think of ETFs?” It’s like, “Well, there’s a million different types of ETF. It kind of depends on your investment goals.” Those two wrappers, though, there’s a lot of similarities between them. They both offer tremendous tax benefits, a big deferral, capital gains deferral component in each one of them. And eventually, the ability to escape capital gains tax liabilities.
With the DSTs, it’s for your heirs, and with Opportunity Zones, it’s for yourself, or your heirs after 10 years or so. But that’s kind of where the similarities end. And beyond that, there are huge, huge differences between the two. Can you drill into the biggest differences between those two different types of wrappers?
Drew: Yeah. I mean, you nailed it, right? They’re tax-advantaged private real estate vehicles. Other than that, they’re opposite ends of the spectrum. DSTs are typically core and core-plus real estate. They’re almost exclusively stabilized assets. And by statute, they’re defined. You know exactly what you’re going into, it’s not a fund structure, nothing changes. So, for instance, it might be a portfolio of Walgreens, very easy to wrap your head around. A big difference is also that they’re very income-orientated. Core and core-plus real estate in general is not swinging for the fences. It’s designed more of an income vehicle.
The QOZs, on the other hand, by definition, with the original use, and to be clear, I’m only speaking about the real estate side because I don’t know a whole lot about the business side, to be frank. But look, that’s ground-up development in most cases. And I would also go that it’s ground-up development by definition and transitioning areas. So, it’s pretty far off on the other side of the risk scale, but provides a much heavier appreciation or growth play. So, if you take that out of the context of real estate for a second, it’s very different.
And I know we gotta be careful here about comparing other investment vehicles or asset classes, but, like, municipal bonds do something very different than venture capital money. One’s not right, wrong, better, worse. It really just depends on what the investor’s trying to accomplish, what their risk tolerance is, do they understand what they’re getting into? And by the way, they’re not necessarily mutually exclusive. I would like to put one thing that we see though, a lot, I think in the distinction with the DSTs and the QOZs is this concept of investor suitability, or that really goes around the risk tolerance.
So, on the DST side, because it is, we’re really talking 1031 exchanges, we almost always see a real estate investor that owns a concentrated position in real estate. They’re probably selling a rental house, something like that. And so, with the DSTs, we’re almost always able to move them from a single property into multiple properties that are stabilized. Point being is that most of the time, we are actually staying at or lowering the risk position that they are already in. And so, DSTs, I would say, are at least a reasonable option in a very high percentage of those situations. QOZs, because they’re open…
Jimmy: You immediately, sorry to break in here, but that type of investor, in that example, he gains immediate diversification to his investment portfolio, his real estate investment portfolio.
Drew: His real estate investment portfolio.
Jimmy: Yeah. And it’s typically institutional-grade type of investments. It’s not some, maybe $2 million or $5 million apartment building that he’s directly owned and operated for God knows how many years, right? And suddenly he’s able to put that to use, fractionalized ownership of a handful of properties that are diversified across different property types or locations, right?
Drew: Correct. So, we just… Case in point, we just did one, a family that sold really a class C, to put it nicely, apartment complex, that had been very hands-on, gotten to the point where we’re talking about, for retirement, just kind of wanted out of that. We transitioned that into 11 DSTs that the underlying holdings of those DSTs equated to 97 properties in 35 states, and was touching almost $2 billion worth of underlying real estate value. So, point being, one property, hands-on, high maintenance, now we’re getting into something that’s somewhat approximating a REIT holding. So, I’d argue that we dramatically changed the risk profile to have your diversification, lower risk, across a broad spectrum of diversification.
Jimmy: And you got the management burden off of their plate.
Drew: We got the management burden off of them for that. But point being, we see a lot of those opportunities where we, it’s pretty clear to say that we’re certainly not increasing the risk where you are. QOZ is a little different, because you’ve got…the good news is any type of gain, right? You could sell your comic book collection, or, it doesn’t really matter. But let’s maybe back up and say, well, maybe things have changed a little bit here in the last few months, but we were seeing investors that had run-ups in the stock market.
So, if I’m coming out of an equities portfolio in the S&P 500 index, I’m now, potentially, moving from a highly-liquid, diversified, blue chip stock portfolio into concentrated, highly-illiquid real estate development, which is the opposite end of the risk spectrum. Now, the flip side is, with QOZs, you’re able to take out your initial basis, whereas with a 1031, you typically have to redeploy 100% of the capital. So, one could argue that if I’m taking my original basis, and that’s risk-off, and I’m over-concentrating something going in with the gains, I think the point being is that they’re just, the investments themselves and the nature of where those gains originated are very different, and so we need to just be mindful that… And remind the investors, sometimes, that, like, tax benefits are great, but that’s, like, a small component of it.
These are long-term, you’re gonna be held up for 10 years. Is this the risk tolerance you’re comfortable with? Do you need income? Do you need liquidity? Do you need diversification? And so, I just caution investors to not be so quick to rush into something strictly for the tax benefits, that it’s really that wealth management, with… There’s a limited number of tax wrapper vehicles available to be able to accommodate those goals, but it’s still the underlying investment, at the end of the day.
Jimmy: Sure. No, and the stock market’s been fairly rocky here, the last, I don’t know, 12 to 18 months or so. And a lot of economic uncertainty brought about by the bear market in the S&P or the broader stock market, interest rates on the rise, inflation numbers on the rise, are we headed toward the recession? So, a little bit more uncertainty. But I remember at the end of 2021, like, the last few months of 2021, we had kind of pulled out of the mini COVID bear market recession, whatever you wanna call it, and the S&P 500 was off to the races again.
And we were looking at the end of that 5-year basis benefit expiring at the end of ’21. Couple that with the fact that there were a lot of stock market gains from the previous 6 to 12 months. But then, going all the way back further than that, if you wanna go back a decade or more, depending on when you got into the stock market, you might have stock market basis from the ’70s, ’80s, ’90s. Any way you look at it, heading toward the end of 2021, you probably had significant gains in the stock market if you were a high-net-worth investor.
And that was the story that I was telling, Drew, was, hey, maybe now’s a pretty good opportunity to diversify out of the stock market because you’re probably overweighted in stocks. Maybe use this as an opportunity to invest in real estate within some Opportunity Zones. Again, it’s not for everybody. There’s a different level of risk here, but it’s something worth taking a look at. I don’t know if that’s as true today, because we have had some bumps in the stock market. That basis benefit went away, but I think it still holds true a little bit.
You likely, I mean, depending on when you got into… And again, this is a hypothetical S&P 500 stock investor, not for everybody. But I think it’s a pretty common stock holding, or something similar to it. You might have a big run run-up, you might have some unrealized gains, maybe you’re still overweight in stocks. I think there’s still a play to at least take a look at Opportunity Zones as a way to diversify and be able to defer that tax hit that you might take on selling any positions within the stock market. I think that’s a great point that you bring up, and I just kinda wanted to piggyback off of that a little bit there.
Drew: You’re absolutely right. And I’d also reminded listeners that it’s not… None of these are all-or-none transactions. So, we’re not necessarily suggesting you put all your money into the … but it’s definitely an option, right? And it’s really just case-by-case. We gotta understand what the investor’s trying to do, and all the things that I mentioned before.
Jimmy: Yeah. And as you rightly point out also, with the… Not with the 1031s and the DSTs, but with the OZs, at least, it’s only the gain that you need to really put to work into the OZs. So, you still have that basis or that principal, whatever you wanna call it, to do whatever else with. Maybe you’d wanna reinvest it.
Drew: And we’ve seen that too, sort of the bifurcation of risk, where if I’m moving to a concentrated, illiquid position, maybe I take the basis and I go do the opposite, depending, maybe if they weren’t in the S&P 500 fund, maybe you take that and put that back in the S&P 500 fund, or something that’s a little more stable, more liquid.
Jimmy: Yep. Yep. Absolutely. So, I’m curious… Kind of getting back to, just to kind of back up a little bit, talk more about Realized. How and why are DSTs a part of Realized’s business model, and what is Realized’s view overall on the tax advantages of DSTs? We talk oftentimes about Qualified Opportunity Zones, OZs on this podcast, and DSTs, Delaware Statutory Trust, have come up a few times here and there. But just kind of curious your thoughts on DSTs overall.
Drew: Yeah, like, we started really because of where Realized started, was that was a space that we understood, and being able to start with the DSTs, and get up and running. What we found, really, the transition for us, is that we started as a direct-to-consumer model. And as I mentioned, some of the early employees here came from real estate families. And so, we recognized that, and as I said up front, wealth management, real estate typically don’t speak to each other. So, we would find an investor base that was typically over-concentrated in real estate, and they would come to us, and they had no financial advisor. Most of ’em didn’t even have a CPA.
Really kind of crazy how many people like this are out there, the true millionaire-next-door, do-it-yourself type. And so, what would happen is we’d get to know them, found that they had a concentrated position in direct property, and Realized would become somewhat of a de facto wealth manager. And due to the nature of their situation, at least, this is the early Realized days, the DSTs were the primary vehicle that we’d go forward with because of, they were mostly holding direct. And I will say that this was actually before QOZs were a thing.
Later, we added QOZs more as a complimentary solution. And that still tends to be the case on the direct-to-consumer side, where we’re typically engaging with an investor who does not have a current financial advisor, or maybe they’re under-advised. However, in recent years, and really, kind of where we are now in the evolution of the company, is we’re moving more into a sub-advisory and portfolio management business, where we are actually partnering with RIAs and wealth managers. And we’re seeing a greater interest and greater use of the QOZ with the wealth, with the sub-advisory space.
I think that that investor set is more varied. The investors that already have a financial advisors are more likely to have things like equities, portfolios, or other, more-diversified holdings. And so, we’ve really now kind of developed this symbiotic relationship with the RIA and the wealth management community. That, our work with the RIAs and the wealth managers really kind of arose from two different ends of the spectrum. As I just mentioned, we became somewhat of a de facto wealth manager for a lot of these investors, but if you’re really looking at it from a client-first perspective…
I give the example of the DST portfolio up front, where we move somebody from a concentrated position to this very diversified portfolio. And that’s great, but the reality is they’re still in a bunch of illiquid real estate. They haven’t totally and holistically managed their wealth. Realized is not a wealth manager, or a holistic wealth manager. We’re never going to be one, we don’t want to be one. But if I’m looking out for the client, especially as they age, and capital preservation becomes more important, you know, kind of lower risk tolerance, as people get older, tends to be natural, we should be looking on a very tax-aware strategy.
We mentioned before the erosion of the embedded net worth, but we should be passing off some of that worth into the advisory network, and getting into more liquids, more things that are estate planning-friendly, really looking out for what the investor’s trying to do. And so, we’ve started partnering with these wealth managers, who seem to be pretty happy with the referrals of the under-advised clients. On the flip side of the spectrum, what we’ve seen is, we mentioned up front the wealth managers and real estate don’t often speak, but going back to that giant $6.4 trillion bucket of wealth that’s sitting there, kind of one of the last untapped pockets of wealth on the American balance sheet, and your traditional wealth manager didn’t always have a viable solution to be able to work with their client on that, so they would …
Jimmy: Because he’s… That wealth manager, he’s busy working on the bonds and equities portfolio…
Jimmy: …making sure that that’s all ticking, maybe doing some insurance stuff a little bit too. But the investment property stuff kind of fell by the wayside, I guess, is …
Drew: Fell by the wayside. We’d see it time and time again, when he said, “Well, what do you do about the 20% of my net worth over here?” And they’d say, “I got nothing.” And then, likewise, on the QOZs, again, very different products, but they’re very real-estate heavy. You know, development, real estate, fund structure. To your point, the wealth manager kind of has a day job with the stocks and bonds and the general portfolio management. For them to try to embrace or become an expert in the real estate field, some of them will do it, and some of them have done a very good job.
Others, especially if it’s on a more kind of select basis, or it’s not a core function of their business, it makes sense to have a group like Realized available to them on an as-needed basis. In that case, we just come underneath as a sub-advisor. In some cases, or in a lot of cases, we never directly interact with that advisor’s client. Don’t need to. Just make them look smart, and happy to go on from there. But the point being is, it’s really just kind of become a pretty symbiotic relationship of us being able to pass clients to them, them being able to pass clients to us. And ultimately, it’s for the benefit of the investor.
Jimmy: I think it’s really helpful, and helping the investor kind of keep all of his ducks in a row with his entire portfolio, not just this 70% or 80% over here, and he’s on his own for the balance of it. So, Realized has been around pre-OZs. You started adding OZs to the platform in 2018, when they started coming online, when the first Qualified Opportunity Fund started coming online, and I’d imagine that probably expanded your market a little bit, because before, you were really only working with real estate investors, who had real estate transactions, and needed to look at 1031s and DSTs.
And now, are you seeing a different capital base? Are you seeing stock investors who have gains? Are you seeing business owners who sell a business, or part of their privately-held business, and they’re coming to you as well? And, I guess, second part of that question, when do you advise whether a DST or an OZ is right for you as a client?
Drew: Sure, sure. So, the answer is yes, it’s obviously expanded. We’ve got more products available, and we’ll continue to add to that as it makes sense. I do think that it really depends on the channel that we’ve come from on our… That direct-to-consumer basis still tends to be… Because we do have a heavy internet presence. And so, we’re finding investors that are, that have that real estate problem that we talked about before, but don’t have that incumbent financial advisor. And so, that’s sort of… That comes in typically more through a 1031 need.
And then the QOZ tends to be more of a follow-on, as I mentioned, that de facto wealth advisor, “Hey, did a great job on the 1031 need. I also, I forgot I’ve got this pension fund over here or whatever may be liquidating, and do you have anything for that?” It tends to almost kind of be the other way around on the RIA side. I think the RIAs, or our sub-advisory, are maybe more in tune with an individual’s non-real estate holdings, the business sale, or the stock portfolio, just because, again, that’s the world that they live in.
And so, in that, the conversation’s almost flip-flopped. The, “I’ve got a non-real estate gain. We’re not real estate experts. Can you help me?” Oh, by the way, did you know that… Have you ever asked a client what they have in direct real estate holdings? So, I didn’t know that they owned four rental houses. So, we can help you with that too, and bring those assets under management. So, I think that that’s the kind of… It really depends on the channel or the path that it comes through.
In terms of which makes sense, again, they’re not necessarily mutually exclusive, although a lot of times, you do have to make a choice. I think you had Jay Frank from Cantor Fitzgerald on a few weeks ago. We work closely with Jay and his team. I think he sums it up pretty much as we would. The first thing you gotta look at is basis. If they have meaningful basis, it’s an opportunity to take some cash out and do something else with it, even move directly away from real estate. Well, actually, I guess, the first thing would be, is it real estate or is it not real estate?
But provided we’re across that, let’s say somebody had a property. If they have meaningful basis, now it’s an opportunity to take some chips out of that and diversify into another asset class. If not, that benefit is definitely muted. One question we ask a lot of is income dependence or income reliance. We have, especially with these heavier real estate-holding individuals, they may have rental properties that were throwing off pretty meaningful monthly income for them. And to go into a QOZ that’s more development-focused, it could be a few years before you see meaningful income.
To be fair, that income may ultimately be higher as you ramp up, but the question is, can you go three years, can you go four years without replicating that check you were getting from the property you sold? That tends to be a really big one for us. And then it’s really that risk profile, that the DST’s more income-orientated, core or core-plus. The QOZs, by definition, are higher octane. And then the last one I’d add there is timeframe, that on a QOZ, very difficult to exit prior to 10 years, and that really probably means it’s more like 12 to 15, or is somebody should be preparing for going into their…
DSTs, on the other hand, some have shorter holding periods. We still would certainly advise that they are longer-term investments, and you should be prepared for that. But we’ve done things like developed a secondary market for DSTs, to provide interim liquidity. And so, we’re seeing, whether it’s the buying or selling of those, where that can be managed oftentimes in a matter of a couple years, still longer term-ish. Point being, there’s a lot more kind of near rollover or nearer-term options to the DST, whereas the QOZ, there’s some options to get out, but it really defeats the entire purpose of going into there.
Jimmy: Yeah. Neither one of them is liquid, but DSTs probably are a little bit more liquid. You can get out of them probably a little bit more easier than you can with a QOZ.
Drew: Yeah. I think that that’s a fair statement. But for the record, they’re very illiquid.
Jimmy: Oh, yes. Of course. Yeah, yeah. Agreed there with you, completely. If you get into either one of these types of deals, you need to plan on being in it for at least a few years, and with QOZs, at least 10 years. I might say, and by the way, I’m not an investment advisor, I don’t wanna be giving investment advice here, but I might say if you’re nearing retirement, probably QOZ may not be a good option, especially if you need income immediately, or income within the next couple years. DSTs might be a better option there. If you have a longer investment horizon, if you’re younger, and you wanna take a little more risk, maybe a QOZ is a better play for you, or at least it’s probably more worthwhile to at least look at, as opposed to a DST, where you can afford to wait a few years before you get that income, and you’re willing to take on a little bit more risk for higher potential reward. Any thoughts there?
Drew: Yeah. And I kind of go back to the, in the wealth management approach, right, is we look at things in its entirety in a portfolio construction. So, again, it’s not necessarily all-or-none. Depending on the investor’s situation…
Jimmy: I was kind of looking at it in a vacuum, I’ll admit. Yeah.
Drew: Yeah, yeah, yeah. So, what we’ve done, like, for instance, on the DST side, is we’ll use, oftentimes, an allocation towards a structured UPREIT product. I don’t know if you’ve gotten into that on this call, but, right, that provides more of a liquidity-ish sleeve. I gotta be careful using that term. But that’s more for those that are looking at capital preservation. The converse, or the other side of that, is a QOZ investment, which could be the growth sleeve. And we could actually do it across the spectrum. So, maybe do some in an UPREIT, some in traditional DSTs, some in a QOZ, and that starts to feel a lot more like a balanced portfolio.
Again, if I was looking at stocks and bonds, I may have an allocation to startup companies or something like that in my higher risk tolerance. Probably not all my money. But would it make sense to put 10%, 20%, 50%, depending on who you are? Yeah, depending on the conversation. I think it really just comes back to that these are just, these are simply inputs, that have certain attributes to them. How do some of the, you know, all the puzzle pieces fit together, and really, on a holistic basis, best position the investor to achieve their goals?
Jimmy: Yeah. How balanced is your portfolio? With stocks and bonds, you have a certain target asset allocation.
Drew: I think that that’s another big one, is if you’re already long in highly risky…if all you own is Bitcoin, maybe putting more risk-on assets is not a good idea. Or conversely, if all you own is really safe stuff, maybe you should be taking more risk. It’s very situational, and individual-dependent.
Jimmy: And it depends a lot on the investment horizon of the individual too.
Jimmy: Are you 65 years old or are you 25 years old? There’s totally different risk profiles for those two types of investors.
Drew: Totally different. Absolutely.
Jimmy: Well just, we’re running out of time, kind of winding down here, but wanted to get a couple of more thoughts from you on broader trends. Drew, the market, obviously has been a little bit tough on everyone as of late. What do you view as some of the biggest challenges, both for Delaware Statutory Trusts and for Qualified Opportunity Zones, Qualified Opportunity Funds moving forward?
Drew: Yeah, I think I can kind of… This is one of the few cases where I probably can bucket them together because I think the overarching themes are the same. We see headwinds in the short term, but we see very strong tailwinds in the longer term. What we’ve been saying to a lot of our investors is, in the near term, tax advantage or no tax advantage, these vehicles are still subject to the same market conditions and fundamentals as the rest of the real estate market, which is admittedly more challenging today.
One partially mitigating factor for the industry is that the catalyst for both DSTs and QOZs is often more of a lifestyle decision than a pure financial decision. For a lot of investors, it may, now just may be the time to sell the business, or now may be time to sell that investment property. As kind of a tangent to that, the other interesting thing, more on the 1031 front, is because of the timelines, you really have to invest back into the same market that you’re selling in. So, a few years ago, maybe you sold something for a really high appreciated price. Problem is you gotta buy back into the market at top of the market, and it’s very difficult to sell high, buy low. Whereas now, maybe you’re not getting the price that you hoped for, but it may provide an opportunity to actually come back in at more of a reset basis into the reinvestment vehicles. So, just gotta weigh that.
Moving away from kind of the general market challenges, I think that one thing we’ve seen in our world is that both DSTs and QOZs have gained an awful lot of popularity in the last few years. And so, we’ve seen a lot of new players in the space, both on the advisory and on the sponsor side. Now, this is America. That’s great. Competition’s a good thing. But I think investors should be prudent in their selection of who they’re working with on both an advisor or sponsor side, and just make sure that it’s not necessarily a late entrance to the space, and that they do actually have the qualifications around them to provide whatever service it may be. I think longer-term, those kinda late movers into the space, as you typically see with any financial situation, right, eventually they’re gonna move out, move on to the next big thing, or perceived big thing.
But for those of us that are committed to the space, we think we’re at the front end of the largest generational wealth transfer in American history, and investment strategies such as DSTs or QOZs, that have those tax components to them and can help maintain some of that wealth really bode well for generational wealth transfer and estate planning. So, we think that the long run is looking very promising.
Jimmy: Yeah. Well said, Drew. I don’t disagree. Hey, really wanna thank you for sharing all of your insights today on DSTs and Opportunity Zones, and how investors should consider those as tools within the broader portfolio management, wealth management of their overall wealth. Before we hop off our interview today, where can our audience of high-net-worth investors and advisors go to learn more about you and Realized?
Drew: Yeah, absolutely best place to be would just go to the website, which is www.realized1031.com. Or as I mentioned, if you go to qualifiedopportunityzones.com, you’ll just get redirected there. From the investor side, I would recommend starting, we’ve got a resources section, as Jimmy, as you mentioned up front. Just a ton of content on all things DST, QOZ, all of the above. For advisors who may be listening, there’s also a financial advisors section on there that will dedicate you to more kind of channel-specific resources. And we’d love to hear from you.
Jimmy: Perfect. And I’ll make sure to link to the Realized website and the different resource centers on the show notes for today’s episode. And as always, you can find those show notes at our website. Just head to opportunitydb.com/podcast. I’ll have links to all the resources that Drew and I discussed on today’s show, and please be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes. Drew, thanks again. It’s been a pleasure speaking with you today.
Drew: Thanks, Jimmy. It’s been fun.