Waiting For the “All Clear”


Brian D. Milovich

Managing Principal, Calvera Partners

The psychology behind investing is vastly underestimated. When prices are low, fear takes over and we ask ourselves, “how much lower will it go?” It seems as if there’s no floor to the pain we might experience. Similarly, when prices are high, a different fear—that of missing out—takes over. We then ask, “why didn’t I buy earlier?” That voice in our head convinces us there’s still room for the price to grow. So, it naturally makes sense to invest more money at the top of the market. Both emotions have flaws.

These strong emotions should be indications to do the exact opposite. Yet it’s difficult to do so. When any market falls and the news cycle is consistently negative, find a way to buy in. Be greedy when others are fearful, as Warren Buffet once said. Similarly, when the market is hot, and the fundamentals don’t make any sense…sell! Once you miss that window to sell, the fear of falling kicks in.

This is easier said than done. No investor has perfect execution. To me, the closest is the late Jim Simons. He, and his company Renaissance Technologies, created an investing algorithm that has made, on average, 40% net returns each year since 1988. Though don’t go rushing out to invest in his fund. The Medallion fund has been closed to outside investors for some time. In 2020, while the Medallion fund gained 76%, Renaissance Technologies’ public funds generated double-digit losses. Even emotionless algorithms don’t always find profits out of every market. Taming emotions and timing markets are difficult tasks.

It’s natural to want to wait for the “all clear” signal to start buying real estate again. It feels better to do that. And, if you’re a money manager, your clients are less likely to criticize you. There’s little upside (in personal capital) for being a contrarian investment professional. We, and most investors, seek to manage the risk we’re taking on. Options traders use stop-losses or other triggers to minimize losses. In our acquisitions, we manage risk by obtaining modest leverage. Our loans are based on today’s cash flow, not projected. We also believe in buying at an attractive basis, relative to other sales and the cost to build new. This is the biggest buy signal for us right now—basis. In most high growth markets, values are down 30%+ from the 2022 peak.

At Calvera, if we wait for the “all clear,” it’s too late. Our job is to outperform. We outperform by acquiring properties when everyone else is afraid to. The best deal we ever purchased was in Sunnyvale, CA in 2011. That deal sat on the market. Nobody wanted it, and it became a stale listing. Yet, the asset was well-maintained for its age. And its location was solid. Sunnyvale is home to Yahoo, LinkedIn, and many tech companies. Other buyers were afraid, though. They didn’t see the potential for rent upside or ancillary revenue streams. They only saw a mid-4 cap price. To them, it wasn’t cheap enough.

This investment generated a 4.1x gross multiple on invested capital. And our initial loan was only ~56% of the purchase price. I’m not suggesting that investing today will generate huge returns like a post-GFC acquisition in the Bay Area. I do, though, want to point out that investors didn’t have the “all clear” in 2011. If they did, they would’ve seen below-market rents. Or a job engine about to take off. They would’ve disregarded the going-in cap rate and evaluated it at stabilization. Once investors woke up to this, those massively out-sized wins disappeared.

Our conviction today is that rent growth will be above-average starting in 2026. The current interest rate environment is stifling future multifamily construction. Combined with positive demographics and unwavering demand for apartments, we expect rents to surge. In some markets now, rents are going up in the face of historic levels of new construction. This is contrary to economist predictions. Once the Fed starts its rate-cutting cycle, we believe cap rates will recede from recent highs. This increases values. And unlike in 2011, there is significantly more capital wanting to own apartments. Once they get the “all clear,” all bets are off.

It’s tough to be resolute when the news says the sky is falling. But we believe that’s precisely the time to be buying real estate.


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