Did Long-Term Investors Get Lucky?


Brian D. Milovich

Managing Principal, Calvera Partners

On social media, everybody has their own “take” on certain topics. One such take recently suggested that long-term holders of real estate essentially got lucky because the past 40 years has been a bull market for bonds (i.e., bond prices went up and bond yields went down). This had the effect of producing consistently declining cap rates, which has therefore pumped up prices of all real estate. If not for the trend in the bond market, holding real estate long-term is the wrong way to own real estate, according to one popular social media user. I think this is an overly simplistic and incorrect take.

The people who I look up to in real estate are those who have been invested for the long-term. They largely invest their own money, self-manage their properties, rarely sell assets, use modest-to-no leverage, and continue to accumulate properties. Their portfolios are usually found in finite geographies where they have deep relationships in their markets for deals, rental knowledge, and people. This investor doesn’t buy when prices are high and is a favored buyer when the market is in distress. The Calvera Income and Growth Fund is specifically modeled after this successful investor profile.

Let’s go back to why anyone would think long-term ownership involves more luck than strategy. Yes, long-term holders of real estate have benefited from declining cap rates. However, this group rarely sells, and timing the market isn’t what the long-term holder does. The beneficiary of lower cap rates, and thus higher values, is probably not the long-term owner him or herself, but rather their heirs or philanthropic endeavors. The point of holding for a longer duration is to build a bulletproof balance sheet and grow cash flow. If these two things are achieved, valuation gains will follow. There is tremendous optionality for someone in this position. They can cash out whenever they want, but more likely they’re looking for ways to minimize (or eliminate) the tax burden of selling or they’re trying to accumulate more properties.

Speaking of accumulation, the biggest benefit of declining bond yields has been an owner’s ability to refinance. If you’re not actively looking to sell, then the best way to unlock value is to refinance. Long-term owners probably did this multiple times to the same asset. They could unlock considerable sums of equity without triggering a taxable event. In this way, the 40-year bull market in bonds helped long-term owners accumulate more properties than if bonds had traded within a narrower band.

Let’s look at the example below and assume someone purchased an apartment property at a 7.0% cap rate and borrowed at 6.5%, amortizing over 30 years. This was a standard deal 15-20 years ago in many markets across the country when rates were elevated. Since the loan is amortizing, it’s actually producing negative leverage (i.e., the net cash yield is lower than the going-in yield) in the short-term. Assuming 2.5% annual NOI growth (an extremely modest assumption) and the same 7.0% cap rate for value, by Year 5, the owner will have doubled his or her money if they chose to sell. By Year 10, the cash yield jumps to 12.5% from 5.9% in Year 1. At that point, between the 10 years of cash flow and increases in equity value, the owner would have more than tripled their original investment. What’s the point of selling, regardless of where the bond market is going, if you own good real estate and it’s producing this much income? The bull market in bonds just supercharged this owner’s ability to accumulate more properties. I’m sure this owner would’ve have been just fine operating under these assumptions for the long-term.

So much of real estate comes down to the acquisition and what was paid for a property. The “basis” (the all-in cost of a property) can determine the outcome of an investment. Business plans can go awry, and the market can change, but if your investment basis is sound then you can mitigate many of the “what ifs” in investing. Even better than a great basis in a single asset is a portfolio of moderately leveraged properties. A well-curated portfolio can create a balance sheet that exudes both financial stability and the nimbleness to be opportunistic buyers. The long-term owner has these traits.

This strategy is boring, though. Accumulating assets, distributing cash flow, and growing equity is a process that thrives on consistency and stability. Selling properties for a “big win” is exciting, and we all like to see that large check come in the mail. Our Calvera Income and Growth Fund is set up to do both. Its primary mission is to be boring and operate like all the best long-term investors and family offices. Those who still want the thrill of the “big win” can take part in the individual assets of their choosing through co-investments. There has never been a better time to start being boring than now. With values down significantly and high interest rates creating a better basis, being boring is exciting.


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