DSTs vs Kakaako Condos: Passive Income Options

Want rental income in Kakaʻako without becoming a full-time landlord? You have two strong paths: buy a condo you control, or place capital into a passive Delaware Statutory Trust. Each can build wealth, but the right fit depends on your time, tax plan, and tolerance for hands-on work. In this guide, you’ll learn how DSTs work, what to know about Kakaʻako condos, and a clear side-by-side to help you choose. Let’s dive in.

What a DST is and why investors use it

A Delaware Statutory Trust is a legal trust that holds investment real estate and issues fractional interests to investors. The IRS allows qualifying DST interests to be used as replacement property in a Section 1031 exchange, which lets you defer capital gains when you follow the rules. See the IRS’s like-kind exchange basics and timing before you plan a swap. You should review the specific DST’s offering documents and consult your CPA or tax attorney for personal guidance.

• Passive and 1031-friendly: The IRS addressed DST eligibility in Rev. Rul. 2004-86, which made DSTs a popular home for exchange proceeds. Learn more about DST 1031 treatment.
• Sponsor-managed: The sponsor acquires and manages the asset. You receive pro rata distributions and tax items. See how typical DSTs are structured.
• Minimums and timelines: Many offerings require $50k to $150k minimums and plan a multi-year hold. There is no reliable secondary market, so plan for illiquidity. Read a DST overview and risks and holding period expectations.

How DSTs pay and what to expect

DST returns come from periodic cash distributions plus any gain at sale. Sponsors often target low to mid single-digit cash yields, but results vary by asset type, debt, and fees. You will not control leasing, refinancing, or capital decisions. DSTs must follow strict rules to preserve 1031 status, which limits active asset management. Review common DST questions and yield drivers.

• Benefits: Passive income, institutional-quality assets, 1031 compatibility. DST basics and benefits.
• Risks: Illiquidity, limited control, fees, and market sensitivity. Understand DST restrictions and why the “seven deadly sins” matter.

Kakaʻako condo investing at a glance

Kakaʻako is Honolulu’s premier urban high-rise district with master-planned growth from Ward Village and Our Kakaʻako. New towers continue to shape supply, amenities, and long-term appeal. See HCDA’s update on Ward Village’s buildout.

Owning a condo gives you control over renovations, tenant selection, and exit timing. It also brings hands-on responsibilities and ongoing costs like HOA dues, insurance, and maintenance. Insurance and special assessments have been rising across Hawaiʻi, which can reduce net yield. Read about condo expense pressures in Hawaiʻi.

• Financing matters: Some buildings do not meet FHA or other agency guidelines. Lenders review project reserves, insurance, and owner-occupancy ratios. Understand condo project approval basics.
• Price and rents vary: Kakaʻako often trades above the island-wide condo median given its location, amenities, and new inventory. Always underwrite with current building-level comps and actual HOA figures.

Honolulu short-term rental rules that affect Kakaʻako

Short-term rentals under 30 days are highly regulated in Honolulu. STRs are generally limited to resort zones and specific mapped apartment zones. Many Kakaʻako buildings are not eligible unless they hold a valid, grandfathered Nonconforming Use Certificate. It is unlawful to advertise an STR that is not allowed or registered. Review Honolulu’s STR rules and maps.

• Action step: Verify zoning, STR eligibility, and NUC status with the Department of Planning and Permitting before assuming any vacation-rental income.
• Market context: Vacation rental demand and supply have shifted since 2019, and policy changes continue to shape occupancy and rates. See recent reporting on Hawaiʻi vacation rental trends.

Head-to-head: DSTs vs Kakaʻako condos

Liquidity and holding period

• DST: Illiquid. Typical holds are 5 to 8 years or longer with no dependable secondary market. More on DST exit timing.
• Condo: You can sell on the open market, but time-to-sale depends on building and price tier. Expect closing costs and potential tax considerations.

Control and workload

• DST: Fully passive. Sponsor runs operations. DST structure overview.
• Condo: You handle tenants, repairs, HOA rules, and insurance unless you hire management, which reduces net yield.

Diversification

• DST: Easy to diversify across property types and markets with smaller increments. Diversification mechanics.
• Condo: Capital is concentrated in one unit and one submarket. Diversifying takes more capital or additional assets.

Income potential and net yield

• DST: Target cash yields are often single digit and vary by offering, fees, and leverage. How sponsors frame yields.
• Condo: Rents in Kakaʻako can be strong, but HOA dues, insurance, and assessments can compress net returns. Accurate underwriting is critical.

Taxes and 1031 exchanges

• DST: Built for 1031 exchanges if the offering qualifies. Timing rules are strict, and you must use a qualified intermediary. IRS like-kind exchange guidance and DST 1031 background.
• Condo: Standard rental property tax treatment and depreciation apply. You can exchange an investment condo into another property or a DST if you follow 1031 rules.

Costs and fees

• DST: Offering, sponsor, and asset management fees are detailed in the Private Placement Memorandum. Fees reduce distributable cash. Review fee structures.
• Condo: Closing costs, monthly HOA dues, insurance, maintenance, special assessments, and property management if you outsource.

Which option fits you

• Choose a DST if you want passive income, 1031 tax deferral, and diversification without landlord work. Plan to hold for several years and accept limited control.
• Choose a Kakaʻako condo if you want direct control, potential personal use, and long-term exposure to Honolulu’s urban core. Budget conservatively for HOA dues, insurance, and potential assessments, and confirm STR legality before you underwrite.

Tip: Combine both over time. Some investors exchange into DSTs for immediate deferral and passive income, then later 1031 into direct ownership when they are ready for hands-on management.

Your due diligence checklists

For DSTs

• Sponsor quality: track record, fee schedule, and any conflicts. What to review in a DST.
• Offering docs: PPM, operating agreement, distribution waterfall, exit triggers. DST document overview.
• Underwriting: tenant concentration, lease terms, debt terms, vacancy and expense assumptions. Key DST underwriting points.
• 1031 mechanics: confirm eligibility and meet the 45-day and 180-day deadlines with a qualified intermediary. DST 1031 framework.

For Kakaʻako condos

• STR legality: verify zoning and any Nonconforming Use Certificate with DPP. Honolulu STR rules and registration.
• HOA health: monthly dues, reserve study, litigation, insurance program, and recent or pending assessments. Expense pressure context.
• Income and vacancy: use current building-level rent comps and realistic vacancy assumptions.
• Financing: confirm project approvals and lender overlays if you need FHA, VA, or agency loans. Condo approval basics.
• Physical condition: review inspection findings and the building’s history with plumbing, concrete, or salt-air impacts.

Next steps

Start with your goals, timeline, and tax picture. If you plan a 1031 exchange, map the deadlines and build your team early. For Kakaʻako condos, underwrite with today’s HOA, insurance, and rent data, and confirm STR eligibility with DPP before you assume nightly rates. For personalized strategy that blends luxury sales expertise with tax-aware planning, connect with Francein Hansen to map the path that best fits your lifestyle and after-tax outcome.

FAQs

Can I use a 1031 exchange to invest in a DST instead of buying a Kakaʻako condo?

• Yes. Qualifying DST interests can be 1031 replacement property if you follow IRS rules and timelines. Review Rev. Rul. 2004-86 and work with a qualified intermediary. DST 1031 background and IRS 1031 overview.

Are short-term rentals legal in most Kakaʻako condos?

• Often no. Honolulu limits STRs to resort zones and certain mapped areas, with narrow grandfathering via NUCs. Always verify zoning and registration with DPP. Review Honolulu’s STR rules.

How liquid is a DST compared with a condo resale in Honolulu?

• DSTs are illiquid with sponsor-controlled exits after multi-year holds. Condos can be sold on the open market, but time-to-sale depends on building, price, and demand. DST hold period context.

What fees should I expect with a DST versus a Kakaʻako condo?

• DSTs have offering and asset management fees disclosed in the PPM. Condos have HOA dues, insurance, maintenance, and possible assessments that impact net yield. DST fee overview and Hawaiʻi condo expense context.

Who should I consult before choosing between a DST and a condo in Kakaʻako?

• Speak with a CPA or tax attorney about 1031 rules and personal tax impact, and with a local real estate advisor who understands Kakaʻako’s buildings and regulations. Start with IRS guidance, then tailor with your professional team. IRS like-kind exchange basics.