The Tortoise vs. The Hare: Why DSTs Beat Syndications in the Long Run
At our December DIG Philly meeting, Fred Hubler broke down the fundamental difference between real estate syndications and DSTs using an Aesop's fable framework. The syndication might sprint ahead in round one, but the DST—steadily compounding without tax drag—wins the marathon.
The Tale of Two $200K Investments
Imagine you have $200,000 to invest in real estate. You have two options:
Option 1: Real Estate Syndication
- Active operators buying properties
- Potentially higher initial returns
- Full tax liability on gains when sold
- Complete restart after each property sale
Option 2: Delaware Statutory Trust (DST)
- Institutional-grade property (like $80 million buildings)
- Potentially lower initial returns
- Tax-deferred through 1031 exchanges
- Continuous compounding across multiple cycles
On the surface, the syndication looks appealing. Higher returns! Active management! Growth potential!
But as Hubler explains, that's only looking at round one.
Round One: The Syndication Might Win
"Day one I might not beat you in the first cycle 'cause that syndication's not Cantor Fitzgerald. They might be buying one or two things where this one over here is buying an $80 million building with a way to already monetize it."
Hubler is refreshingly honest: In the first investment cycle, the syndication might generate higher returns.
Why? Syndications are often:
- Buying value-add properties with upside potential
- Implementing improvement strategies
- Taking calculated risks for higher rewards
- Operating with more flexibility and speed
Meanwhile, DSTs are typically:
- Buying stabilized, institutional-grade assets
- Focusing on reliable income over maximum appreciation
- Operating with more conservative strategies
- Prioritizing consistency over home runs
First cycle comparison:
- Syndication: Maybe 20-25% total return over 3-5 years
- DST: Maybe 12-18% total return over 5-7 years
The syndication wins round one. But investing isn't a one-round game.
Round Two: The Tax Advantage Emerges
Here's where the story changes: "Mine will come in with less return but no taxes."
When the syndication property sells after 3-5 years:
- You receive your profits
- You pay capital gains taxes (federal + state, potentially 25-35%)
- You reinvest what's left
Syndication example:
- Initial investment: $200,000
- Property sells for gain: $50,000
- Taxes on gain (30%): -$15,000
- Capital to reinvest: $235,000
When the DST property sells:
- You receive your proceeds
- You 1031 exchange into another DST
- Zero taxes paid
- Full amount reinvested
DST example:
- Initial investment: $200,000
- Property sells for gain: $40,000
- Taxes on gain: $0 (deferred via 1031)
- Capital to reinvest: $240,000
Even though the syndication had higher returns ($50K vs $40K), after taxes you have less capital to deploy in round two.
By Round Two: The DST Pulls Ahead
"By the second flip of that money, I'm ahead. I'm literally the tortoise—not making as much but having nothing slowing me down."
This is the power of tax-free compounding. Let's see how it plays out:
After Two Cycles (10-12 years):
Syndication path:
- Cycle 1: $200K → $250K, pay $15K tax → $235K
- Cycle 2: $235K → $294K, pay $18K tax → $276K
- Net after two cycles: $276,000
DST path:
- Cycle 1: $200K → $240K, defer tax → $240K
- Cycle 2: $240K → $288K, defer tax → $288K
- Net after two cycles: $288,000
The DST investor now has $12,000 more capital working for them, despite lower per-cycle returns.
After Three Cycles (15-18 years):
Syndication path:
- Starting cycle 3 with $276K
- After taxes: ~$335K
DST path:
- Starting cycle 3 with $288K
- No taxes: ~$346K
The gap widens with each cycle because:
- The DST compounds on larger amounts (no tax leakage)
- The difference accelerates over time
- Tax savings get reinvested and compounded
"Swap Till You Drop" - The Technical Term
Hubler uses the industry phrase "swap till you drop" to describe the 1031 exchange strategy: Keep exchanging from property to property, deferring taxes indefinitely.
"If you swap till you drop, which is the technical term... at some point that step up, the taxes I never paid, never get paid."
Here's the magic of this strategy:
The Estate Planning Advantage:
When you pass away owning DST interests:
- Your heirs receive a step-up in basis
- All deferred capital gains disappear
- The tax bill you've been deferring for 20-30 years evaporates
- Your kids inherit the property at current market value with zero tax liability
"And now if it's a DST, my kids get out. Like they get off the plane."
Your children can either:
- Continue the 1031 chain with their inherited basis
- Sell immediately and pay zero capital gains (due to step-up)
- Convert to cash without the tax burden you've been deferring
The Tortoise Strategy in Practice
Let's see the full lifecycle comparison:
The Syndication Hare:
- Year 0: Invest $200,000
- Year 4: Sell, pay taxes, reinvest $235,000
- Year 8: Sell, pay taxes, reinvest $276,000
- Year 12: Sell, pay taxes, reinvest $320,000
- Year 30: Final value ~$550,000, owe deferred taxes on lifetime gains
- Death: Heirs inherit but may owe taxes on unrealized gains depending on structure
The DST Tortoise:
- Year 0: Invest $200,000
- Year 6: Exchange tax-free, reinvest $240,000
- Year 12: Exchange tax-free, reinvest $288,000
- Year 18: Exchange tax-free, reinvest $345,000
- Year 30: Final value ~$600,000, all taxes deferred
- Death: Step-up in basis, heirs inherit $600,000 with ZERO tax liability
The tortoise wins. And it's not particularly close.
What About the Potential Higher Returns?
The obvious question: "But what if the syndication consistently beats the DST by a wide margin?"
It's possible. Aggressive syndications might generate 25-30% returns in hot markets while DSTs deliver 12-15%. But:
Syndications carry different risks:
- Sponsor risk (operator skill and integrity)
- Concentration risk (fewer properties)
- Market timing risk (value-add strategies)
- Liquidity risk (harder to exit if sponsor struggles)
- Less regulation than institutional DSTs
The tax drag is significant:Even if syndications generate 50% higher returns per cycle, the 25-35% tax haircut on each exit narrows the advantage considerably. And the gap closes further with each successive cycle.
When Syndications Still Make Sense
To be fair, syndications aren't inferior—they're just different:
Syndications work well for:
- Accredited investors who want higher risk/reward profiles
- Those with expertise to evaluate sponsors and deals
- Investors who won't be doing multiple cycles (tax drag matters less)
- People who want more transparency and communication with operators
- Those seeking potentially higher returns and willing to accept the risks
DSTs work well for:
- Investors planning multi-decade 1031 chains
- Those prioritizing tax efficiency and estate planning
- People wanting institutional-grade assets and sponsors
- Investors who value liquidity through multiple DST options
- Those focused on capital preservation over maximum returns
The Compound Interest of Tax Deferral
Warren Buffett famously said his favorite holding period is "forever." The DST strategy mirrors this philosophy—not by never selling, but by never triggering taxes.
Each time you defer taxes:
- You have more capital compounding
- That capital generates more returns
- Those returns generate more returns
- The tax you would have paid keeps working for you
Over 20-30 years, this creates staggering differences. A 2-3% annual drag from taxes doesn't sound like much, but compounded over decades, it's the difference between good wealth and generational wealth.
The "Nothing Slowing Me Down" Advantage
Hubler's phrase captures it perfectly: "I'm the literally the tortoise not making as much but having nothing slowing me down."
The syndication investor faces friction at every cycle:
- Time to analyze new deals
- Risk of picking bad sponsors
- Tax preparation and payment
- Reduced capital to redeploy
- Starting fresh each time
The DST investor glides from property to property:
- 1031 exchange mechanics handled by professionals
- Institutional sponsors pre-vetted
- No tax stops along the way
- Full capital redeployed immediately
- Momentum builds continuously
The Multi-Generational Perspective
This strategy isn't about winning the next 5 years. It's about winning the next 50 years—and setting up your children to win the 50 years after that.
When your kids inherit DST interests with stepped-up basis:
- They can cash out tax-free if they need liquidity
- They can continue the 1031 chain if they want passive income
- They can split the interests among multiple heirs easily
- They start fresh with no deferred tax liability
Your discipline in "swapping till you drop" becomes their financial freedom.
The Bottom Line
Hubler's tortoise and hare analogy isn't just clever—it's mathematically accurate.
Round 1: The syndication might win with higher returns.
Round 2: The DST pulls even or ahead due to tax advantages.
Round 3+: The DST accelerates away as compounding on untaxed gains widens the gap.
Final Round (your death): The DST wins decisively as deferred taxes disappear through step-up in basis.
You might feel slower running the DST race. Your friends in syndications might brag about their 30% returns while you're earning 15%. But check back in 20 years.
The tortoise, steady and patient, crossing the finish line with more wealth and zero tax burden, while the hare is still catching its breath and writing checks to the IRS.
In investing, as in fables, slow and steady often wins the race.
Delaware Statutory Trusts and real estate syndications are both securities that require accredited investor status. Returns shown are hypothetical examples for illustration only. Actual returns vary significantly based on property performance, market conditions, and sponsor execution. Past performance does not guarantee future results. Tax treatment depends on individual circumstances; consult qualified tax professionals. This article is for educational purposes only.
