The Importance of Rent Increases and DSTs

One of the factors every investor should weigh when evaluating DSTs is the ability of the DST to raise rents to offset inflation.

Some triple net (NNN) properties have little (1-2% per year) to NO rent escalations built into their long-term leases.

If inflation increases to even a 3-4% level, which is about the historical average for inflation, your NNN property could easily drop in value.

Therefore, if I am going to recommend a NNN DST to clients, there has to be something in the lease to allow rent escalations above 1-2% per year. 

A lease with rent increases linked to the CPI Index can be attractive, but most CPI Index-linked DSTs seem to have caps of around 2% per year – in my opinion, not enough to eliminate the risk of rising inflation.

Rent escalations and inflation are of primary concern for NNN commercial properties where long-term leases are common.

With a NNN property, which the majority of DSTs available today are, you have an inherent risk that there will be a loss of principal as interest rates rise.

I don’t care how secure the high-credit quality tenant is, they will not pay investors any more than they are required to by the lease.  If inflation rises, your high-credit NNN DST may lose principal.

I prefer DSTs which can potentially keep up with inflation by raising rents every year, without restriction.   

Apartments and Self-Storage DSTs have short lease periods and are thus my favorite DST property types.  By keeping up with inflation, chances of principal loss can be  greatly reduced.

As a consultant working with DSTs and other tax-advantaged methods, I can steer my clients to the best DSTs available in the marketplace today.  Not all Sponsors have the expertise that multi-family DSTs require.

I help clients find the few Sponsors that have long and successful track records.   Give me a call for a consultation today at  (617) 965-7900.