Comparing DST Cash Yield vs Direct NNN Cap Rates After Fees and Leverage

A 6 percent cap rate and a 5 percent DST rate are different fractions, so subtracting one from the other tells you nothing

A cap rate divides a property's net operating income by its price and ignores financing, fees and the money spent to buy or sell. A DST's distribution rate divides the cash the trust actually pays out by the equity investors put in, after debt service, the sponsor's asset-management fee and whatever the trustee holds back as reserves.

Both the numerator and the denominator differ. The DST numerator is smaller because debt service and fees have been paid and because Rev. Rul. 2004-86 has the trustee distribute only what is left after reserves; the denominator is larger because the equity raised includes the offering load rather than just the building's price.

Baker 1031, a DST marketplace, frames its own comparison the same way: the cap rate is a property-level unlevered figure, while the cash-on-cash return is annual pre-tax cash flow over the equity you actually invested. Neither number is wrong; they answer different questions.

Walk one hypothetical $10 million building through both structures and the gap comes from load, debt and reserves in that order

Assume a single-tenant building bought for $10,000,000 with $600,000 of net operating income, a 6.0 percent cap rate. Every figure below is hypothetical and rounded; the fee percentages are placeholders you replace with the PPM's actual use-of-proceeds table.

The load is not hypothetical. The two DST Form Ds opened for this page, Passco 1000 West DST's 2017 filing and NexPoint Marina DST's 2026 filing, each estimated sales commissions at 8.75 percent of the total offering in Item 15, before the promoter payments reported in Item 16.

The order of the drag matters: the load removes roughly a tenth of the equity before it earns anything, the annual fee shaves a fraction of a point every year, and reserves defer cash rather than destroy it.

• Direct, all cash: $600,000 ÷ $10,000,000 = 6.0 percent, before vacancy, re-leasing costs and your own time.
• Direct, 50 percent debt at 5.5 percent interest-only: $600,000 − $275,000 of debt service = $325,000 on $5,000,000 of equity, or 6.5 percent.
• DST, same loan, 10 percent load: to place $5,000,000 of equity in the building the sponsor raises about $5,555,556; after $275,000 of debt service, a 0.5 percent asset-management fee of about $27,778 and $30,000 of reserves, roughly $267,000 remains, about 4.8 percent of the money invested.
• Per $100,000 invested: about $6,500 a year owning directly with the same loan, about $4,800 through the DST, before either owner pays tax.

Leverage lifts both yields when the cap rate beats the loan rate, but only the DST's debt is frozen for the life of the trust

Debt improves cash-on-cash only while the cap rate exceeds the interest rate. Move the hypothetical loan from 5.5 to 7.0 percent and the direct levered return falls to 5.0 percent ($250,000 on $5,000,000) while the DST payout falls to about 3.5 percent, because $350,000 of debt service now comes off the same $600,000.

A direct owner can refinance, pay the loan down or sell when rates move. A DST trustee cannot: Rev. Rul. 2004-86 conditions the trust's tax status on the trustee not renegotiating the terms of the debt, so the loan in the PPM is the loan you hold until the property sells or the note matures. What happens at maturity is covered on DST leverage and interest-rate risk.

The NNN cap rate assumes the tenant never leaves; price the vacancy, the re-leasing cost and your own hours before calling it 6 percent

A cap rate is an in-place number. Nine months of vacancy on the hypothetical building removes $450,000 of rent while property taxes, insurance and loan payments continue, and a new lease usually costs tenant improvements and a leasing commission on top; one such event can consume more than a year of the difference between the two structures.

A DST with one net-leased tenant carries the same property-level risk, only with a master lease in between and reserves the sponsor has already set aside; a multifamily or multi-tenant DST spreads it across many leases. Whether that spread is meaningful is examined on how much diversification you get in a DST, and the triple-net page describes the net-lease sector as DST replacement property.

Count your own hours as a cost too. Rent collection, lease enforcement, insurance renewals and eventually a re-tenanting project are work a direct owner does or pays a manager to do, and the manager's fee comes out of the same NOI the cap rate was quoted on.

Two more fees sit outside the year-one yield, so compare the structures over the full hold rather than the first distribution

The load is only the first fee. Most DST offerings also pay the sponsor an annual asset-management fee and a disposition fee at sale, both disclosed in the PPM and itemised on DST fees and loads; the year-one distribution rate already reflects the annual fee but says nothing about the exit.

FINRA Regulatory Notice 20-21 requires a broker's retail communication that quotes a distribution rate to state what portion comes from operations, what portion is return of principal and what portion is borrowings, and bars annualising a rate until it has been paid for two consecutive full quarters. Ask the same of any direct-ownership pro forma: a cap rate quoted on a lease with free-rent months is a return-of-capital story too.

The full-hold comparison is an IRR, which folds the load, the annual fee, the disposition fee and the sale price into one number; the mechanics are on DST cash yield vs total return.

Convert the DST target rate back into an implied cap rate, then decide what passivity is worth to you

The cleanest comparison reverses the DST arithmetic. Take the projected annual cash to investors, add back the asset-management fee and the reserve contribution, add the debt service, and divide by the trust's total purchase price including its acquisition fee; the result is the cap rate you are effectively buying at, which you can set against buildings you could purchase yourself.

In the hypothetical the implied cap rate is the same 6.0 percent, which is the point: the DST delivers less cash per dollar because of fees and load, and in return you get no management, no personal loan signature, fractional access to larger assets and the ability to split one sale across several trusts. DST vs direct NNN property weighs those qualitative trade-offs and DST vs direct real estate ownership covers the control question more broadly; run the numbers with your CPA or attorney before relying on either structure's projections.

• Step 1: projected cash to investors + asset-management fee + reserve contribution + debt service = property-level NOI.
• Step 2: NOI ÷ (purchase price + acquisition fee) = the cap rate you are paying through the trust.
• Step 3: compare that cap rate, not the distribution rate, with direct-purchase alternatives, then price the management, liability and diversification differences separately.