Real Estate Strategy Simulator

The adaptive strategy and blends

The adaptive strategy buys value-add property like the others. From a year after stabilization, it checks each asset once a year. It estimates next year’s return on the equity it would walk away with after selling costs and expected tax: next year’s cash flow plus expected appreciation. If that falls below the hurdle, it sells, waiting for a better market if cap rates are elevated, and redeploys. Otherwise, if a cash-out refinance would return at least the set share of that equity and enough time has passed since the last one, it refinances and redeploys the cash. Otherwise it holds.

The blend splits starting equity across strategies in the weights you choose. Each piece runs independently through the same simulated market, so the blend shows how mixing changes the range of outcomes. The pieces don’t share cash reserves, which slightly overstates the blend’s risk.

Reading the hurdle

The base hurdle is what a new deal earns on equity with no buying edge; 6% is close to the median deal IRR the model produces at zero edge. With the edge link on, the hurdle rises with the operator’s edge: a purchase discount adds value worth the discount on the price, spread over the expected hold and divided by the equity each dollar of price requires. At a 5% edge the hurdle is about 8.4%; at 10%, about 11.3%. The scoreboard subtitle shows the hurdle in use.

With the link on, the rule behaves the way a skilled operator should: at little or no edge it holds and refinances, and as edge grows it shifts to selling and recycling. In testing it matched or slightly beat the best single strategy at every edge from 0% to 20%.

Same futures for every strategy

Each simulation draws one 25-year path for mortgage rates, cap rates, and rent growth, with occasional recessions that cut rents and push cap rates up. Every strategy lives through the identical path, so differences in results come from the strategy, including the risk of selling or buying at a bad moment.

The five strategies

Buy and hold makes one value-add purchase, stabilizes it, and keeps it. Sell and recycle sells a year after stabilization and rolls the proceeds into the next value-add deal. Refi and redeploy keeps every asset and pulls equity out with a cash-out refinance at stabilization and at each loan maturity. Build to hold develops, refinances into permanent debt at completion, and reinvests the cash-out. Build to sell develops and sells at completion.

Exits and overruns

Strategies that sell can wait up to two years past the planned sale when cap rates sit more than half a point above their long-run level, as most operators would in a weak market. A development waiting to sell carries its construction loan, interest only, at the floating rate. Cost overruns are paid from cash reserves first; any remainder comes from rescue capital that costs 15% more than the overrun itself.

How to read the statistics

Because every strategy faces the same market in each simulation, the cleanest comparison is paired: the share of simulations in which a strategy ends with more after-tax wealth than buy and hold. An interval that stays above or below 50% marks a difference larger than simulation noise. Medians carry a 95% interval as well.

Debt and distress

All permanent debt is fixed rate and amortizing, sized to the lower of the loan-to-value and debt-coverage limits at the rate prevailing that year. Construction debt floats and its interest is added to the loan. When a refinance comes up short, the shortfall is paid from cash reserves; if reserves can’t cover it, the asset is sold if it has equity and lost to the lender if it doesn’t.

Taxes

Federal top rates including the 3.8% net investment income tax: 40.8% on ordinary income, 23.8% on long-term gains, 28.8% on unrecaptured §1250 depreciation. No state tax. Operating losses carry forward. A set share of sales go through a 1031 exchange with carryover basis; for reference, Ling and Petrova found 88% of exchange-acquired properties were later sold in a taxable sale. Repeated build-to-sell is taxed as dealer income by default, which also rules out a 1031. Tax triggered by foreclosure is ignored.

What counts as the end

At the horizon every remaining asset is sold and taxed, unless you turn on the stepped-up basis option, which treats the portfolio as passing to heirs. Projects still under construction are marked at cost. Operating cash flow and idle cash sit in a reserve account earning the after-tax cash rate.

What it deliberately leaves out

Debt structure choices, fund vehicles and fees, tax tools beyond the 1031, asset durability, partial sales, and diversification across several assets at once. These are step-two design choices inside a strategy, so the model holds them neutral and identical across all five.

How the defaults were set

Calibrated to multifamily as of October 2026. Starting cap rate 5.5% and mortgage rate 6.4% reflect current agency pricing, with debt coverage of 1.35x at 65% loan-to-value. Income growth of 2.5% matches NCREIF’s recent same-store figure. A 15% annual recession probability reflects the post-war pattern of roughly one recession every six years. The 1031 share of 25% sits above Ling and Petrova’s 10% to 20% of all commercial sales, on the view that a deliberate recycler exchanges more often.

Not yet sourced: treat as sensitivity ranges

The size of a recession year’s shock (a 5% income drop and a 0.75-point cap rate jump by default) is an assumption, not a calibrated figure. Test a mild case (2% and 0.25 points) and a severe case (10% and 1.5 points) before drawing conclusions. The value-add lift distribution and development overrun figures carry the same caution.

Calibrated to evidence, not sponsor targets

The value-add income lift is set so that a value-add hold with zero operator edge earns the same median wealth as buying stabilized property with the same leverage, consistent with Pagliari’s finding that value-add funds did not beat leveraged core. Any outperformance in the model therefore comes from the edge dial. Development assumes a 1.5-point spread and a 10% average overrun; results are very sensitive to both, so test them.

Acquisition debt is sized by income

Every loan, including acquisition loans, is the lower of the loan-to-value limit and what the property’s income can carry at 1.35x coverage. With cap rates below mortgage rates, coverage usually binds, so effective leverage runs well under 65%.

Two scenario switches

Normalization moves the long-run cap rate to 7%, closer to the historical spread over Treasuries. The LP switch removes 1031 exchanges, since LPs in a syndication generally can’t exchange their share individually.