Opportunity Costs of Cash


Brian D. Milovich

Managing Principal, Calvera Partners

The stock market is on a tear. The S&P 500 seems to hit a new high every week. It’s up 35% over one year and up 26% since October 2023. I’d be lying if I said that I didn’t have some level of FOMO (the fear of missing out). I don’t follow many individual stocks closely, though like most people, equities make up a part of my overall portfolio. However, I do know real estate well, and our bull run hasn’t reappeared yet.

Cash has been a favored investment because we haven’t seen 4% or 5% interest rates in over a decade. As many were waiting for a recession in 2023, a sure investment return in cash seemed wise. A good portion of the market didn’t get the memo that the economy would continue to grow. Or that inflation would decline without a recession. Or that unemployment would remain low and buttress a hopeful soft landing. Those invested in cash thought their opportunity cost was minimal.

Let’s look at some basic numbers to visualize the opportunity cost of staying in cash in 2023. Assume the average investor was comparing a 5% yield in cash versus a potential recession or modest recovery in the stock market (see Table 1.0). I’m over-simplifying things, but let’s stick with this example. Assigning a 50% probability to each outcome, the expectation was a -5% return in the S&P. Cash was the better choice.

Table 1.0

Event Probability Outcome Expectation
Recession – Market goes down 50% Down 20% -10.0
Market goes up 50% Up 10% 5.0
Total -5.0


If this investor was optimistic and believed that a recession had a 10% probability (Table 1.1), then the market expectation was a 7% return. Though that’s higher than the 5% money market, 2% more doesn’t seem worth the additional risk. There were plenty of reasons for this investor to stay in cash. What they didn’t expect to see is 5% in a money market versus 30% in the S&P 500. But viewing opportunity cost in hindsight isn’t recommended.

Table 1.1

Event Probability Outcome Expectation
Recession – Market goes down 10% Down 20% -2.0
Market goes up 90% Up 10% 9.0
Total 7.0


If you missed the runup in the S&P (or Bitcoin), how can you position yourself to take advantage of a recovery in the real estate market? A similar opportunity cost analysis is warranted, though with a long-term perspective. Apartment values have already declined 20-30% since 2022. Since 1978. 1, institutional real estate has returned, on average, 9.3% per year on rolling 10-year hold periods. It has also never had a negative return viewing the data this way. And the lowest 10-year return was 6.1%.

Real estate could decline further from here. If the Fed doesn’t cut rates and the long end of the interest rate curve rises, real estate cap rates will increase, and values will decrease. While certainly possible, I wouldn’t place a large probability on a significant decline happening. Even if it does, real estate’s secret weapon is cash flow.

Cash flow is a major component of real estate’s return, and it’s making a comeback. Investors, including Calvera, are looking for new acquisitions with neutral or positive leverage. This is pushing up cap rates and in-place yields. Higher cash flow ensures the investment isn’t dependent on out-sized appreciation or an unrealistic business plan. Even when values are down and rates are up, cash flow continues to be generated and can provide a positive return.

Evaluating the same historical return data, income (i.e., cash flow) has averaged 6.7% per year on a rolling 10-year hold since 1978. This means cash flow makes up over 70% of long-term investment returns for real estate. Appreciation is only 2.5% per year over the same periods, yet it garners so much attention. In the long-term, cash flow makes real estate returns less volatile.

Back to the opportunity cost of staying in cash versus investing in real estate. We’re long-term investors, so let’s evaluate the 10-year US Treasury (4.3%) and institutional apartments. I like the prospect of a long-term 9.3%, with tax advantages, versus 4.3% in a treasury (also with tax advantages). I like this even more because we’re coming off a period of significant declines in value. Additionally, cash flow, the most important part, is rising again. It will rise even greater when apartment supply wanes in 2026. There are many reasons to be excited that real estate will out-perform.

1NCREIF (National Council of Real Estate Investment Fiduciaries) NPI Detail Report ending Q4 2023 (quarterly data from 1978-2023)


Click here for more information on the Calvera Income and Growth Fund.

Or to find out more directly from a member of our Investor Relations team, click here.

2 Embarcadero Center, 8th Floor
San Francisco, CA 94111

729 Washington Ave N, Suite 600
Minneapolis, MN 55401




Performance data listed in this website or is otherwise provided by Calvera Partners, LLC, or its affiliates (“Calvera”) with respect to a particular property or project represents past performance calculated for the relevant project and does not purport to reflect the overall performance of any private funds managed by Calvera, which may include other projects, as well as charge additional fees or carried interest, or have additional expenses, which would reduce the overall performance of the project from the perspective of a fund investor. Past performance does not guarantee future results; Current performance may be lower or higher than performance data presented. Calvera is not required by law to follow any standard methodology when calculating and representing performance data; the performance of any of Calvera’s projects may not be directly comparable to the performance of other investment vehicles or funds; and qualified potential investors can contact Calvera Partners for more current performance data of any private funds managed by Calvera. 

This website is provided for informational purposes only. Nothing contained in this material is an offer or solicitation to buy or sell any security. In addition, (i) any securities offered to investors that respond to any general solicitation or general advertisement made by Calvera, may be sold only to accredited investors; (ii) such securities will be offered in reliance on an exemption from the registration requirements of the Securities Act and such securities offered are not subject to the protections of the Investment Company Act or required to comply with specific disclosure requirements that apply to registration under the Securities Act; (iii) Neither the SEC, nor any state securities regulator, has passed upon the merits of or given its approval to any securities offered by Calvera, the terms of the offering, or the accuracy or completeness of any offering materials or the accuracy or completeness of any of the information or material provided by or through this website; (iv) the securities will be subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and (v) investing in securities involves significant risks, and investors should be able to bear the loss of their investment. Please click here for additional important disclosures.