Investing 101

Good Things Come to Those Who Wait: The J Curve

When is pay day?

As a real estate investment platform, we get this question all the time. The quick answer is 3-5 years, and for some this can be a major buzz kill. But with investing, and particularly real estate investing, rings true the old saying “good things come to those who wait.”

The historical returns of real estate investing (meaning privately owned physical properties, not publicly traded REITs on an exchange) show a negative rate of return in the beginning, followed by a low rate of return, followed by a dramatic increase over time. This trend is referred to as the J-curve because, well, the graphical representation is shaped like a J. Don’t get it? Then, never mind the graphs, let’s talk real world…

Imagine you buy a rundown property with the intention of fixing it up, renting it out and eventually reselling it for a higher price. So, first things first, you invest a significant amount of money in renovations—think hardwood floors, central AC/heat and gutting of the kitchen and bathrooms. Sounds expensive right? RIGHT! And between permitting, negotiating with contractors, and then actually doing the renovation, this can take months or even years to complete. This is that time when you may need a little extra wine (or whatever may be your remedy), as you’re in that negative rate of return phase (the “U” part of the “J”).

Once finished though, you find a renter that’s willing to pay a pretty penny to live in a freshly renovated space, and you’re receiving monthly cashflow (tenant rent) to cover your mortgage and then some. This is the ramp up period (making your way to the other side of that “U”). But the bigger pop in your returns (the vertical line of the J) will ultimately be realized once you refinance or sell the property—and that’s when you can pop the champagne! This value creation business plan is the core of most private real estate investing, and School of Whales is no different.

Our fund managers, however, strategically select properties at different stages in development to optimize the J curve model and generate steady returns for our whales—think J curve on J curve on J cuuuurve! Julia & Henry’s is our mature project, just waiting on permitting to open. So, this property is headed for the ramp-up phase. The Historic Post Office, on the other hand, is mid-construction with two levels completely finished and the basement, first floor and second floor soon to begin with remodeling, so this is the negative rate of return phase—And there are more properties in the underwriting pipeline!

Whether you’re investing in real estate or the stock market (and ideally it’s both), long-term strategies (buying and holding for 5, 10 even 30 or more years) historically perform better than short term strategies. So, sit back relax and let your money work for you!