DST Cash Yield vs Total Return: Understanding the Numbers in Marketing Decks

Cash-on-cash is a fraction of your equity in one year; IRR is the rate that makes every cash flow, including the sale, sum to zero

A deck's current yield takes the projected distribution for a single year and divides it by the equity you invest, load included, before tax. It says nothing about later years, nothing about the sale and nothing about what happened to the load.

Total return is usually shown as an IRR: the single discount rate at which your investment, every distribution and the final sale proceeds net to zero. Baker 1031's returns primer separates the two streams the same way, current income during the hold and the capital result at sale, and IRR is simply the number that combines them with the timing attached.

A third figure, the equity multiple, is total cash back divided by cash in, with no time weighting; 1.5x over five years and 1.5x over ten years are different IRRs but the same multiple.

Run one hypothetical deal three ways and the IRR moves from 3.7 to 7 percent while the yield stays at 5

Assume $100,000 invested, $5,000 distributed each year for seven years and a sale at the end of year seven. All figures are hypothetical and rounded, and the arithmetic is the same one your CPA or attorney can reproduce in a spreadsheet.

The yield was identical in all three cases below. Every difference lives in the sale, which is the number with the least certainty and the most assumptions behind it.

• Sale returns $117,000: IRR about 7.0 percent, equity multiple 1.52x. The property's equity had to grow by roughly 30 percent from the money that actually bought real estate.
• Sale returns $100,000: IRR 5.0 percent, multiple 1.35x. You earned exactly the yield, and appreciation did no more than recover the load.
• Sale returns $90,000: IRR about 3.7 percent, multiple 1.25x. The building sold for what the trust paid, but the load never came back, so the 5 percent yield overstated the outcome by more than a point.

The front-end load and the back-end disposition fee sit inside the sale number, so the IRR carries fees the yield never shows

Only part of your $100,000 buys real estate. Form D Item 15 requires the issuer to report sales commissions and finders' fees, and Item 16 the gross proceeds paid to executive officers, directors or promoters; in the filings opened for this page, Passco 1000 West DST reported an estimated $1,815,625 of commissions on a $20,750,000 offering in 2017 and NexPoint Marina DST $3,737,134 on $42,710,095 in 2026, 8.75 percent in both cases before promoter payments.

At sale a disposition fee to the sponsor comes off the top and any accrued asset-management fees are settled. The yield is computed after the annual fee but knows nothing about the load or the exit fee, which only the IRR captures; the line items are itemised on DST fees and loads and where to find them in the documents on reading a DST PPM and Form D.

Most of the projected IRR above the cash yield is appreciation, which the sponsor assumes and no one guarantees

In the hypothetical, the two points between a 5 percent yield and a 7 percent IRR come entirely from the property being worth more at exit than the equity that went in after load. That depends on rent growth and on the cap rate a buyer pays in year seven, and a DST cannot manufacture it: Rev. Rul. 2004-86 limits the trustee to minor non-structural modifications, so there is no value-add lever, as DSTs and value-add explains.

The projection also assumes the loan is refinanced or repaid on schedule and the sale happens when planned; a maturity in a bad market can convert the appreciation case into the $90,000 case. Ask for the exit cap rate against the going-in cap rate, and for the annual rent growth assumed, because those two inputs move the IRR more than anything else in the deck.

FINRA rules shape what a broker's deck may show, so a projected IRR you see is either from the PPM or out of bounds

FINRA Rule 2210(d)(1)(F), as applied in Regulatory Notice 20-21, generally prohibits retail communications from projecting or predicting returns to investors such as yields, income, dividends or capital appreciation percentages. The notice distinguishes the PPM's factual and financial disclosures from marketing material, and says a retail communication bound with or attached to a PPM remains subject to the rule.

The notice also sets distribution-rate ground rules: a firm must not annualise a rate until the program has paid distributions at that rate for at least two consecutive full quarterly periods, must disclose what portion represents cash from operations, return of principal and borrowings, and must balance benefits with the risks of losing value, illiquidity and speculation. A deck that quotes a target IRR from the first month, or a rate without its funding sources, is telling you something about the seller as well as the deal.

Six questions to ask before you believe a deck's numbers

Set the projected IRR against a return you can see, such as the current Treasury yield for the same holding period, and ask whether the spread pays you for illiquidity, leverage and sponsor risk; distributions are partly sheltered by depreciation, so depreciation in DST investments affects the after-tax version of the comparison. Then work through the list below with the PPM open.

• What exit cap rate is assumed, and how does it compare with the price the trust just paid?
• What annual rent growth is assumed, and what did the property actually do over the last three years?
• What share of the first-year distribution is funded from reserves rather than operations?
• What are the load, the annual asset-management fee and the disposition fee, in dollars on my investment?
• When does the loan mature, and what happens to distributions if it cannot be refinanced on the projected terms?
• Which of the sponsor's earlier programs hit their projected IRRs, and which did not? Evaluating DST sponsors shows how to read that record.