DST vs. NNN Lease: Two Paths to Passive Income

Quick comparison

How NNN works as a 1031 replacement

You purchase a property leased to a single tenant under a triple-net lease. The tenant pays base rent plus all operating expenses: property taxes, insurance, and maintenance. You collect rent and have virtually no landlord responsibilities.

Common NNN tenants include national credit retailers (Walgreens, Dollar General, AutoZone), quick-service restaurants (Chick-fil-A, McDonald's), and essential-service businesses (medical offices, convenience stores).

You own the property directly, can mortgage it, and decide when to sell. When you're ready to exit, you can 1031 exchange again or sell outright.

How DSTs work as a 1031 replacement

A Delaware Statutory Trust is a legal entity that holds title to real property and sells beneficial interests to investors. As a DST investor, you own a fractional share of the trust's property (or properties).

DST sponsors are typically large real estate investment firms that acquire institutional-quality assets - Class A apartment complexes, medical office portfolios, industrial distribution centers, net-leased retail - and package them as DST offerings for 1031 exchangers.

You invest your exchange equity (minimum typically $100K-$200K), receive monthly distributions, and wait for the sponsor to sell the property (typically 5-10 years). At that point, you can 1031 exchange again into another DST or direct property.

Income and returns

NNN target yields: 5.0-7.5% cap rate, depending on tenant credit quality, remaining lease term, and location. Investment-grade tenants with long leases command lower cap rates (lower yield, lower risk). Sub-investment-grade or shorter-lease properties offer higher yields with more risk.

DST target yields: 4.5-6.5% cash-on-cash distributions, depending on the offering. DSTs have fee layers (acquisition fees, asset management fees, disposition fees) that reduce net returns compared to direct ownership. However, DSTs can access larger, higher-quality assets and use leverage at the trust level.

Total return comparison: NNN returns depend entirely on your specific property's rent growth and appreciation. DST returns depend on the sponsor's asset management and disposition timing. Over a 7-10 year hold, well-chosen NNN properties and well-managed DSTs can produce similar total returns, but the variance is higher with individual NNN properties.

Risk profiles

NNN risks:

• Tenant vacancy (single point of failure - one tenant leaves, income goes to zero)
• Re-leasing risk (single-purpose buildings can be hard to re-tenant)
• You bear all property-level decisions (when to sell, how to maintain, whether to re-lease)
• Market value fluctuations affect your equity directly
• Concentration in one property, one market

DST risks:

• Sponsor risk (the management company's competence and integrity matter enormously)
• No control (you can't vote to sell, refinance, or change strategy)
• Illiquidity (no secondary market for most DST interests; you wait for sponsor disposition)
• Fee drag (acquisition fees of 1-3%, annual management fees, disposition fees reduce net returns)
• Structural limitations (DSTs cannot take on new debt, make significant improvements, or accept new capital contributions)

Which fits your situation

NNN is better if:

• You have $500K+ in exchange equity
• You want direct ownership and control
• You want to mortgage the property (using leverage to enhance returns)
• You're comfortable selecting and evaluating individual properties
• You may want to 1031 exchange again in 5-10 years on your own timeline

DSTs are better if:

• Your exchange equity is under $500K (or you want to diversify across multiple offerings)
• You want truly zero involvement
• You need to close quickly (DSTs close in days, NNN transactions take weeks to months)
• You're under 45-day deadline pressure and need a reliable closing option
• You want access to institutional-quality assets you couldn't afford individually

Both work if:

• You're a retiring landlord who wants passive income and tax deferral
• You're exchanging out of an actively managed property
• Your primary goal is predictable cash flow, not aggressive growth

Many investors use both: exchange the majority of equity into a NNN property and place the remainder into a DST to ensure full deferral.