IRC section 1031 is a complex tax concept: you should consult a legal or tax professional regarding the specifics of your situation.
Investing in NNN properties has risk. Risk may include loss of value, loss of equity and an inability to sell the property at any given time. In addition, the following other risks apply: Vacancy (Since most properties are single tenant, if that tenant moves out or closes, it can have a significant impact on value) ; Location matters (changes in a community can impact value.); Specialized buildings (Typically, NNN properties are designed and built to meet the requirements of a specific tenant. Re-leasing a property to a different type of tenant can take a long time and cost the landlord a significant amount of money); False sense of security from a Corporate Guaranty (Even large companies can fail); Failing to Understand the Tenant’s Ability to Pay Rent; Interest rate risk; Length of the lease (the shorter the riskier); trends in retail shopping (could Amazon or other online stores impact the viability of this business). Be sure to evaluate all of these risks before you purchase a NNN property.
Diversification is not a guaranty to eliminate risk. DSTs are fundamentally real estate investments and may be subject to volatility in the entire real estate asset class. Also investing in different regions may open up regional risks associated with local economies, natural disasters and other unforeseen circumstances.
Limited personal liability
Some DSTS have loans and they are typically non-recourse to the DST as well. In the event of a poor performing asset, the DST may be under no obligation to pay the mortgage loan if cash flow does not cover debt service in which case the DST may stop making payments and risk foreclosure which would wipe out your investment.
Access to institutional-quality property
A newer asset or institutional asset is not a guaranty of success. Newer assets have little or no track record and due to possibly high development cost may require higher rents to cover the costs and service debt if any. If higher rents are not competitive it could result in high vacancy and rental income insufficient to cover operating costs and debt service.
Leveraged investments are subject to additional risks, including, but not limited to: foreclosure risk, lender requirements for maintenance, interest rate volatility, balloon risk, and more.
Tax laws can change at any time, and estate plans using current laws may require changes in the future. Certain situations may often be grandfathered in, but there is no guaranty. With no hands-on management, you give up control. Not all DSTs perform the same and investing in more than one may result in varied performance.
“Swap until you drop”
Tax laws could change. If properties do not appreciate in value, it may be difficult to execute 1031 Exchanges.
Ease of Ownership
Without any say in the management or decisions on capital improvements, sale or refinance of the asset you have no control. It may be very difficult to sell if you experience unexpected changes in life circumstances.
Eliminate “boot” risk
If your “boot” is very small, there may not be any DSTs accepting very small investments.
There is the possibility of the DSTs available at the time of your requirement not meeting your needs.