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Real Estate Interview Questions

Guide to Understanding the Top 25 Technical Real Estate Interview Questions (with Answers)

Last Updated February 20, 2024

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Real Estate Interview Questions

How to Prepare for the Real Estate Interview

Currently preparing for an upcoming real estate interview?

Our first piece of advice is to create a plan – which might initially sound a bit trivial – but understand that the recruiting process is a competition.

Therefore, it is necessary to stand out from the rest of the candidate pool to receive an offer.

One practical question to ask yourself to frame the right plan and improve your candidacy is, “What do I bring to the table that makes me stand out above the rest of the competition?”

Before preparing for the behavioral and technical interview questions, take a moment to step back to comprehend each step of the recruiting process beforehand.

So, what should you expect in a real estate interview?

Real Estate Interview Process Description
Round 1. Informational Interview
  • The informational interview is an informal conversation with either a human resources (HR) member or a mid-level employee of the firm.
  • The priority at this stage is to portray your understanding of the role for which you are interviewing and the firm’s background.
  • Therefore, spend time preparing for the common topics covered in behavioral questions.
  • While most questions will be behavioral, be prepared for an unexpected technical question or two, just to cover all bases.
Round 2. Technical Interview
  • Passed the informational interview? The next stage is the technical interview, which is usually conducted by a mid-level professional, such as a senior associate.
  • The scope of technical questions is relatively limited, and there should not be too many unexpected “curve balls” (i.e. technical questions are more to “check the box”) to ensure an understanding of the fundamental real estate concepts.
  • The technical questions are intended to confirm that the candidate has a solid baseline to build upon, including the ability to explain concepts intuitively – so practice speaking coherently and breaking down technical concepts using easy-to-comprehend language.
Round 3.1 Superday Interview
  • The Superday interview is the final round of the interview conducted in person, in most cases.
  • At the Superday, you are likely to interview with the firm’s junior and mid-level professionals – where you should anticipate the most technical questions – and also senior professionals, where most questions should be behavioral.
  • The questions asked will be a mix of behavioral and technical questions to continue evaluating your technical understanding and investing acumen, as well as how you might fit into the investment team (“cultural fit”).
  • At this point, everything is “fair game”, so prepare for all sorts of questions.
Round 3.2 Financial Modeling Test + Case Study
  • The final part of a Superday interview is normally a modeling test (or case study).
  • The difficulty of the modeling test can range from a quick exercise conducted on-premise (~1 to 2 hours) to a take-home case study that must be returned within a few days.
  • In 2023, more firms are relying on modeling tests and case studies to determine the technical competency of candidates.
  • The modeling test is frequently the most challenging part of the interview process for candidates, as performing poorly on the modeling test can be enough to derail one’s candidacy.

Real Estate Interview Questions – Technical Training Guide

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What to Expect in a Real Estate Interview?

The questions to expect in a real estate interview are mostly contingent on the position of the interviewer, albeit prepare for unexpected “curve balls”.

  • Junior to Mid-Level Professional → The interviewer delegated with conducting the technical interview is often a junior to mid-level professional.
  • Senior Executive → If speaking with a senior executive of the firm – which usually occurs in the later stages of the interview process – the questions are likely to be more casual and behavioral instead of technical.

Before delving into our technical interview questions, we’ve compiled some brief guidelines on strategies for effective interviewing while navigating the recruitment process.

First and foremost, know your resume inside out, because each line or detail stated on your resume is fair game for questioning.

Thus, come into the interview prepared to walk through your resume and compile a list of potential questions that the interviewer might ask based on the content of your resume, including the more challenging ones.

If real estate truly is the career path that a candidate is set on pursuing, and enough time was spent researching the firm in-depth beforehand, navigating behavioral questions should be effortless and conversational.

While this should go without saying, do NOT lie on your resume.

A substantial proportion of the behavioral questions are sourced from your resume, so be able to expand upon each bullet point listed and answer any follow-up questions.

Start preparing early and research the firm, because the time spent learning about the firm reflects your commitment (or lack thereof) to joining the firm.

Firms can easily recognize the interest level of a candidate in the early stages of the interview process, and distinguish between candidates who came prepared versus those who waited until the last minute to study.

With regard to the topics to research about a given firm, below is a list of the bare minimum:

  • Q. “What is the investment strategy of the firm?”
  • Q. “What types of properties does the firm invest in?”
  • Q. “What is the structure of the firm’s investments?” (i.e. equity or debt)
  • Q. “What are the investment criteria of the firm?” (e.g. geographical focus, transaction size, risk/return profile, etc.)
  • Q. “Explain one past transaction completed by the firm, and why you found it interesting?”

On the topic of the real estate interview technical concepts, “practice makes perfect” – therefore, participate in mock interviews.

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Behavioral Real Estate Interview Questions

Before we delve into our list of top 25 technical interview questions, make sure not to neglect the behavioral interview part of the interview process.

The cultural fit with the firm and team members is one of the most influential factors that influence hiring decisions.

Yet many candidates prioritize preparing for the technical interview and modeling tests, in place of researching the firm, its investment strategy, and meeting the employees on a personal level.

Curious about what types of behavioral interview questions are asked in a real estate interview?

We’ve listed below some of the more common behavioral questions that usually precede technical questions.

  • Q. “Tell me about yourself?” or “Walk me through your resume.”
  • Q. “Why are you interested in joining our firm?”
  • Q. “What do you know about our firm and investment strategy?”
  • Q. “Why should we hire you out of all the other candidates?”
  • Q. “What is your current level of proficiency with Excel?” (and maybe ARGUS if applicable)
  • Q. “What goals would you like to achieve at our firm in the near term (and long-term)?”
  • Q. “Where do you see yourself five years from now?”
  • Q. “What are your strengths and weaknesses?”
  • Q. “How would your peers describe you?”
  • Q. “Tell me about a failure.”

Technical Real Estate Interview Questions

The technical interview questions in a real estate interview are designed to vet potential candidates and identify which particular interviewees seem passionate about real estate and are keen on earning an offer to join the firm.

If a candidate performs well in the technical interview, the positive outcome demonstrates to the real estate firm that the candidate puts in the time and effort to be sufficiently prepared.

Of course, there is still a long road ahead in the interview process, since the technical interview occurs in the initial stages. So, the best approach is to take each round one step at a time.

We’re now ready to move on to our next section, where we’ve compiled 25 technical real estate interview questions on the fundamental concepts in real estate finance and investments.

However, please note that our answers are deliberately in-depth to ensure the interview guide is beginner-friendly.

In the actual interview setting, respond to each question in a more concise, structured manner. Furthermore, most questions are intentionally conceptual, rather than based on actual numerical calculations.

Common Real Estate Interview Questions and Answers

Q. Why Real Estate?

There is no correct answer to this particular interview question, per se. However, there are some guidelines to abide by to properly answer the question and ensure the technical portion of the interview gets off to the right start.

Starting off, the initial part of the answer should be personalized and based on your unique interest in real estate.

The response should follow a structure and address points, such as the specific event or person that piqued your interest in real estate, followed by the steps then taken to learn more about the industry.

The personal experiences that confirmed your interest and further compelled you to pursue a career in real estate should be delivered intriguingly to the interviewer.

The common pitfall here is to avoid offering a bland, “cookie-cutter” response.

Quick tips to put together a sufficient response are as follows.

  • Personalize Response → The right mentality to answer the question is to view it as an opportunity to share the details that caused your initial interest in real estate from a personal perspective, followed by the unique factors that affirmed your commitment to a long-term career in real estate. The rationale provided should demonstrate your personal interests and personality type to the interviewer.
  • Chronological Order → The structure of your response should flow chronologically to ensure that each anecdote builds on top of the prior, rather than a disorganized list with no connections.
  • Storytelling Element → The response should mention the events (or people) that piqued your interest in real estate and the pivotal moments in your career path to date. However, it is critical to allocate the time spent discussing each point based on significance to refrain from going off on a tangent. The interviewer is more likely to be engaged and find the answer intriguing if the response is kept succinct. Therefore, extract only the central parts and trim the “excess”, like a synopsis (and anticipate follow-up questions).
Sample Response – Analyst Role at Real Estate Development Firm

“I’ve been set on pursuing a career in real estate for as long as I can remember, because my father worked as an architect at a full-service construction management firm.

Growing up in that environment, the idea of managing the construction process seemed intriguing, and that interest has only become more palpable over time.

Given my background in finance and completion of past internships at commercial development firms, I’m committed to a long-term career in property development because the job’s responsibilities entail sourcing and analyzing potential investment opportunities, including more hands-on work around coordinating with architects, engineers, and builders to design a viable project plan.

Therefore, the day-to-day tasks performed on the job blend analytical and collaborative work, which is the type of environment where I’m certain I can improve as a professional and contribute toward meaningful projects.

Of all the asset classes out there, real estate is by far the most fulfilling to me on a personal level, as the continued development of properties is an irrefutable part of our economy that contributes real, tangible value to society.”

Q. What are the Different Types of Real Estate Investment Firms?

Real Estate Firm Description
Real Estate Private Equity (REPE)
  • REPE firms raise capital from investors – i.e. the fund’s limited partners (LPs) – to deploy their capital contributions into real estate investments.
  • The strategy of REPE firms is oriented around the acquisition and development of commercial properties like buildings, managing the properties, and selling the improved properties to realize a profit.
  • The limited partners (LPs) of REPE firms include pension funds, university endowments, fund of funds (FOF), and insurance companies.
Real Estate Investment Trusts (REITs)
  • REITs are companies with ownership of a portfolio of income-generating real estate assets over a wide range of property sectors.
  • If compliant with the relevant regulatory requirements, these investment vehicles are exempt from income taxes at the corporate level.
  • However, the drawback to REITs is the obligation to issue 90% of their taxable income to shareholders (or unit-holders) as dividends.
  • In effect, REITs rarely have cash on hand because of the dividend payments and tend to fund their operations by raising debt and equity financing in public markets.
  • Most REITs are publicly traded entities and are subject to strict requirements on public filing disclosures.
Real Estate Development Firm
  • Real estate development firms, or “property developers”, construct properties from scratch.
  • In contrast, most other investment firms acquire existing properties, such as office buildings.
  • Therefore, development firms purchase land and build properties, while other firms participate in acquisitions.
  • The life-cycle of development projects is substantially longer than acquisitions, as one might reasonably expect.
Real Estate Investment Management
  • Real estate investment management firms raise funding from limited partners (LPs) to acquire, develop, and manage commercial properties to later sell them at a profit.
  • REPE firms are distinct from real estate investment firms because REPE firms are generally structured as closed-end funds (i.e. stated end date in fund life), while real estate investment management firms are most often open-end funds (i.e. with no end date in fund life).
Real Estate Operating Companies (REOCs)
  • Real estate operating companies (REOCs) purchase and manage real estate.
  • Unlike REITs, REOCs are permitted to reinvest their earnings, rather than the mandatory obligation to distribute a significant portion of their earnings to shareholders.
  • The drawback, however, is that REOCs face double taxation, i.e. taxed at the entity level and then the shareholder level.
Real Estate Brokerage Firms
  • Real estate brokerage firms serve as intermediaries in the real estate industry to facilitate transactions.
  • A commercial broker is hired to protect their client’s interest in a purchase, sale, or lease transaction.
  • Commercial real estate brokerage firms can help clients identify a new property to purchase, market, or sell a property on behalf of the client, as well as negotiate the terms of a lease as a formal “tenant representative”.

Learn More → Real Estate Investment Firms

Q. What are the Different Property Classes in Real Estate Investing?

In the real estate industry, properties are commonly classified into different property classes based on the perceived risk of each property investment type.

  • Class A → Class A properties are the “premium” properties, most often the most modern or recently renovated properties located in prime locations with significant market demand (and anticipated near-term tailwinds). These types of properties are equipped with the highest-quality amenities and offerings for tenants, which are usually those that fall under the higher-income category and thus command the highest rent pricing in their respective markets. Class A properties are typically professionally managed and pose the lowest risk to investors, and lower risk corresponds with lower yields.
  • Class B → Class B properties tend to be more outdated (i.e. older), yet are still built with high-quality construction and well-maintained, although a tier below Class A properties. Class B properties can be less desirable to affluent tenants, and their locations have less demand from buyers in the market. Still, Class B properties offer higher yields and potential value-add opportunities, which attracts more middle-income tenants.
  • Class C → Class C properties are even more outdated and less modernized compared to Class B properties and located in far less desirable locations relative to the prior two property classifications. Class C properties often need more renovations, and come with issues such as outdated infrastructure, sub-par amenities, and more maintenance issues that must be fixed or repaired. Hence, Class C usually attracts lower-income tenants and, given the higher risk profile, offers higher returns to investors to compensate for the higher risk.
  • Class D → Class D properties are the bottom-tier classification and consist of properties in poor condition, while located in areas with limited market demand. The Class D properties require substantial spending on renovations to modernize the property, and urgent repairs, such as leakages. The market demand primarily stems from lower-income tenants and presents the most risk to investors. Most institutional investors tend to avoid Class D properties because of the spending requirements and challenges in modernizing a property with exhaustive areas of improvement.

Q. What are the 4 Main Real Estate Investment Strategies?

Broadly speaking, the investment strategies in the real estate industry can be segmented into four distinct categories.

Real Estate Investment Strategy Description
Core
  • Core investments are recognized as the least risky strategy and involve modern properties in prime locations occupied by highly creditworthy, affluent tenants.
  • The investor’s priority with core investments is stability in performance and limiting downside risk.
Core-Plus
  • Core-plus investments are marginally riskier than the core strategy, with several commonalities, aside from necessitating some capital improvements.
Value-Add
  • Value-add investments come with more risk because the properties need considerable capital improvements, including the potential of collection issues from tenants with poor creditworthiness.
  • Real estate investors implement significant improvements and renovations to existing properties to create incremental value, resulting in higher pricing and more market demand.
Opportunistic
  • Opportunistic investments are the riskiest strategy that entails new development or redevelopment projects that are not only time-consuming but also require substantial spending on resources.
  • Given the relationship between risk and return, investors who decide to pursue these projects expect to generate the highest rate of return.

Q. What is NOI in Real Estate?

The NOI, an abbreviation for “Net Operating Income,” measures the profitability of income-generating properties before subtracting non-operating costs, such as financing costs and income taxes.

The net operating income (NOI) of a property is calculated by determining the sum of its rental income and ancillary income, followed by deducting any direct operating expenses.

Net Operating Income (NOI) = (Rental Income + Ancillary Income)  Direct Operating Expenses

The rental income component is the rent payments collected from tenants (i.e. the lessees), while ancillary income consists of any side income sources, such as parking fees, laundry fees, storage fees, late fees, and fees charged for amenities access (e.g. on-premise gym, pool).

The NOI formula neglects capital expenditures (Capex), depreciation, financing costs (e.g. mortgage payments, interest), income taxes, and corporate-level SG&A expenses.

Since non-operating items are disregarded in the net operating income (NOI) metric, the NOI is the industry-standard measure of profitability to analyze property investments, particularly for comparability purposes.

Learn More → Net Operating Income (NOI)

Q. What is the Difference Between NOI and EBITDA?

NOI measures the profitability of properties in the real estate industry, whereby the operating income generated by a property is reduced by direct operating expenses.

Like EBITDA, NOI excludes depreciation and amortization (D&A), certain non-cash charges, income taxes, and financing costs like mortgage payments.

Net Operating Income (NOI) = (Rental Income + Ancillary Income) Direct Operating Expenses

On the other hand, EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization” and is by far the most common measure of core profitability for corporations.

The calculation of EBITDA and NOI includes only operating items, causing the metrics to be suited for comparability, i.e. analyze the target company side-by-side with comparable peers.

EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization
EBITDA = Operating Income + D&A

The effects of financing costs, such as mortgage payments and interest, including discretionary management decisions like capital expenditures (and the depreciation method), are removed in both NOI and EBITDA.

The distinction between NOI and EBITDA boils down to industry classification because the factors that constitute “operating” and “non-operating” items are contingent on the industry at hand.

  • Operating Items → The direct operating expenses subtracted in NOI include property management fees and maintenance fees, such as repairs and utilities. NOI neglects non-operating items like EBITDA, however, from the perspective of a real estate property, not a corporation. For instance, property insurance, property taxes, and property management fees are subtracted to calculate NOI, which are irrelevant costs to the calculation of EBITDA for non-real estate companies.
  • Industry-Usage → NOI is seldom recognized outside the real estate industry, whereas EBITDA is the most widely used measure of operating performance across a wide range of industries.

Therefore, NOI measures the profit potential of a property, whereas EBITDA reflects the operating profitability of an entire corporation.

Depreciation Concept Nuance | Real Estate vs. Corporations

The depreciation concept is nuanced in real estate because unlike standard circumstances – where depreciation reduces the carrying value of a fixed asset (PP&E) on the balance sheet to reflect deterioration (“wear and tear”) – properties such as homes can be priced and sold on the market at a premium to the original purchase price.

The recognition of depreciation in the real estate industry is more related to tax deductions, while depreciation is intended to match the purchase of a fixed asset (PP&E) with the timing of its economic utility for corporations.

Q. How is the Cap Rate Calculated?

The cap rate, shorthand for “capitalization rate”, estimates the return that a real estate investor expects to earn on a property investment.

The cap rate is the ratio between a property’s net operating income (NOI) and its current market value, expressed as a percentage.

Cap Rate (%) = Net Operating Income (NOI) ÷ Property Value

The primary use-case of the cap rate by real estate practitioners is to analyze a potential property investment side-by-side with comparable properties to determine if the property’s risk-return profile is worthy of an investment.

Learn More → Cap Rate Primer

Q. Explain the Relationship Between the Cap Rate and Risk.

The capitalization rate, or cap rate, is a real estate metric that measures the return rate on a property investment based on the income that the property is expected to generate.

Since the cap rate is a measure of returns, the metric is also a measure of risk, since risk and return are two sides of the same coin.

In short, higher cap rates coincide with higher risk, while lower cap rates correspond with lower risk.

  • Higher Cap Rates → Properties with higher cap rates are implied to carry more investment risk. Why? Higher cap rates suggest property prices are low relative to the income generated. For instance, the underlying cause could be factors such as minimal market demand for the location, poor economic conditions in the location, and properties constructed using outdated materials.
  • Lower Cap Rates → On the other hand, properties with lower cap rates are perceived as lower risk. These properties are often in high-demand modern locations with more upside potential in rent prices. Properties with lower cap rates carry less risk and are more secure – resulting in reduced returns – which certain risk-averse investors are open to in exchange for mitigating potential capital losses.

Q. What Does Funds from Operations (FFO) Measure?

The funds from operations (FFO) metric is used to analyze the operating performance of real estate investment trusts (REITs).

FFO is a non-GAAP financial measure but is still widely recognized among participants in the REIT sector.

In practice, the funds from operations (FFO) metric is a method to estimate the capacity of a REIT to generate enough cash.

The calculation of funds from operations (FFO) starts with the reconciliation of net income from the income statement (i.e. the “bottom line”).

The most notable adjustment is the add-back of the depreciation of real estate assets, with further adjustments for other non-recurring items, such as subtracting any gains on an asset sale.

Funds from Operations (FFO) = Net Income to Common + Depreciation  Gain on Sale, net

Contrary to a frequent misconception, the FFO metric is not a measure of cash flow.

While the funds from operations (FFO) metric adds back depreciation to net income – similar to the indirect method of preparing the cash from operations (CFO) section – FFO ignores the change in working capital, including other discretionary adjustments.

Learn More → Funds from Operations (FFO)

Q. What is the Difference Between FFO and AFFO?

Originally, Nareit created the funds from operations (FFO) metric because REITs could not be accurately analyzed using traditional U.S. GAAP metrics.

Hence, FFO reconciles net income – the accrual accounting-based profitability measure (the “bottom line”) – to measure the operating performance of REITs more accurately.

However, there are a few drawbacks to the funds from operations (FFO) metrics, such as the inclusion of numerous non-recurring items and omitting capital expenditures (Capex), the most significant cash outflow for most companies.

The adjusted funds from operations (AFFO) metric gained traction over time, as many REIT analysts and market participants perceived AFFO as the more intuitive method to measure operating performance.

The AFFO is simply FFO after applying further adjustments – as implied by the name – such as normalizing for items like non-cash rent (i.e. “straight-lined”) and subtracting the recurring maintenance capital expenditures (Capex).

Adjusted Funds from Operations (AFFO) = Funds from Operations (FFO) + Non-Recurring Items  Maintenance Capital Expenditures (Capex)

AFFO should theoretically reflect the operating performance of REITs more accurately, since the metric addresses the shortcomings of FFO. But the more pressing matter was the discretion given to management teams on the adjustments to apply, which turned out to be a “slippery slope” in which the absence of industry-wide standardization became an issue.

Like FFO, the AFFO metric also neglects the adjustments for working capital.

Learn More → Adjusted Funds from Operations (AFFO)

Q. What are the 3 Methods of Appraising a Property?

Property Appraisal Method Description
Income Approach
  • The property value is estimated by dividing a property’s pro forma, stabilized net operating income (NOI) by the market cap rate.
  • The market cap rate is determined by analyzing the cap rates of comparable properties to arrive at a benchmark to guide the pricing of the property.
  • By dividing the property’s forward NOI by an appropriate cap rate, the income stream is effectively converted into a property value estimate.
Sales Comparison Approach
  • The sales comparison approach relies on the recent historical sales data (i.e. selling prices) of comparable properties to estimate the valuation of a property.
  • The selected transactions provide insights regarding the price per unit or square foot valuations, including the current market cap rate.
  • The sales comparison approach assumes that the attributes of each sold property contributed to its sale price.
  • Factors such as the floor area, view, location, number of rooms (and bathrooms), property age, and property condition are considered.
  • Based on the comparable property’s features relative standing to the target property, the appropriate adjustments are applied to determine the property value.
Cost Approach
  • Under the cost approach, or “replacement cost”, the property value is estimated based on the total cost of replacing the property.
  • The estimated property value represents the total cost incurred if the property were hypothetically destroyed and had to be replaced.
  • Unlike the income approach and sales comparison approach, the cost approach is the only method in which comparable properties are not part of the valuation.

Learn More → Property Value

Q. Walk Me Through the Income Approach (or Direct Capitalization Method).

Under the income approach (or direct capitalization), real estate appraisers can estimate property value based on the future income potential of the property.

The direct capitalization method estimates the value of a property based on the income expected to be generated in a one-year time horizon.

The initial step is to project the forward NOI on a twelve-month basis, in which the operating drivers are the vacancy and credit losses and operating expenses assumptions.

The forward NOI reflects the pro-forma, stabilized net operating income (NOI) of the property.

The estimated property value can then be determined by dividing the market cap rate by the rental property’s forward NOI.

Estimated Property Value = Forward NOI ÷ Market Cap Rate

Learn More → Income Approach (Direct Capitalization Method)

Q. What is the Intuition Behind the Cost Approach?

The basis of the cost approach (or “replacement cost”) is the principle of substitution, which states that no rational investor would pay more for a property than the cost of constructing an equivalent substitute with similar utilities and amenities.

The cost approach to appraisal is grounded on the notion that the pricing of a property should be determined by the cost of the land and construction, net of depreciation.

Estimated Property Value = Land Value + (Cost New Accumulated Depreciation)

General Rules of Thumb:

  • Replacement Cost < Asking Price → Current Pricing is Potentially Reasonable
  • Replacement Cost > Asking Price → Current Pricing is NOT Reasonable

Therefore, an investor should not purchase a property at a higher price, relative to the cost of reconstructing a similar property.

Q. What Does the Cash on Cash Return Measure?

The cash on cash return, or “cash yield”, is a real estate metric that measures the annual pre-tax earnings on a property relative to the initial contribution to purchase the property itself.

The formula to calculate the cash-on-cash return is the ratio between the annual pre-tax cash flow and invested equity.

Cash on Cash Return (%) = Annual Pre-Tax Cash Flow ÷ Invested Equity
  1. Annual Pre-Tax Cash Flow → The annual pre-tax cash flow generated by the property. The cash flow component is pre-tax, yet the metric is post-financing – i.e. the financing costs were deducted, such as mortgage payments and interest expense – therefore, the annual pre-tax cash flow is a “levered” metric.
  2. Invested Equity → The original equity contribution on the date of property purchase, i.e. the initial cash outlay.

Learn More → Cash-on-Cash Return

Q. What are Vacancy and Credit Losses in Real Estate?

The “Vacancy and Credit Losses” are a downward adjustment applied to the potential gross income (PGI) of a property to arrive at the effective gross income (EGI) metric.

  • Vacancy Loss → The term “Vacancy Loss” refers to the estimated losses incurred by property owners from rental properties (or units) left vacant, i.e. an occupancy rate of 0%. The vacancy loss is estimated using assumptions regarding the time between a rental unit remaining vacant and occupancy by a tenant, assuming the unit eventually becomes occupied. Usually, the vacancy loss is projected as a percentage of the potential gross income (PGI), which is the total gross income under the hypothetical scenario where all units available for rent are occupied.
  • Credit Loss → The “Credit Loss” component describes the losses incurred by the property owner from a tenant who is unable to fulfill their rent payment obligations on time. The tenant could request an extension on the due date – usually with fines attached – or default on the contractual rental obligation, resulting in an eviction process.

Q. What is the Gross Rent Multiplier (GRM)?

The gross rent multiplier (GRM) is the ratio between the market value of a property and the property’s expected gross annual rental income.

By comparing the property investment’s current fair market value (FMV) to its expected annual rental income, the number of years necessary for the property to break even and become profitable can be estimated.

Gross Rent Multiplier (GRM) = Market Value of Property ÷ Annual Gross Income

The gross rent multiplier (GRM) reflects the estimated number of years needed by a particular property’s gross rental income to pay for itself.

Generally speaking, the gross rent multiplier is more of a “quick and dirty” method to screen potential investments by evaluating the potential profit potential of property investments.

Learn More → Gross Rent Multiplier (GRM)

Q. How is the Yield on Cost (YoC) Calculated?

The yield on cost, or development yield, is the ratio between a property’s stabilized net operating income (NOI) and the total project cost, expressed as a percentage.

Yield on Cost (%) = Stabilized Net Operating Income (NOI) ÷ Total Project Cost

Where:

  • Stabilized Net Operating Income (NOI) → The stabilized net operating income (NOI) of a property is the expected annual NOI after new construction and property development work is complete. A stabilized property is fully operational and generates income around the baseline level deemed sustainable, and a more accurate representation of its run-rate income (and performance is consistent with comparable properties).
  • Total Project Cost → The total cost component of the property depends on the real estate project type. For development projects, the total cost will be composed of the purchase price and the developmental costs. But for acquisition projects, the spending will predominately be related to maintenance, fixtures, renovations, and discretionary upgrades.

Learn More → Yield on Cost (YoC)

Q. What is the Difference Between Effective Gross Income (EGI) and Net Operating Income (NOI)?

The difference between effective gross income (EGI) and net operating income (NOI) is as follows.

  • Effective Gross Income (EGI) → The EGI is the total income generated by a property after factoring in vacancy and credit losses. EGI not only includes the property’s rental income but also other ancillary income sources, such as income from amenities, vending machines, laundry facilities, parking permits, etc. The EGI is calculated by taking the potential gross income (PGI), adding other ancillary sources of income, and then subtracting the estimated income lost from vacancies or credit losses (i.e. collection issues).
  • Net Operating Income (NOI): The NOI is the remaining income upon subtracting direct operating expenses from the property’s effective gross income (EGI). Operating expenses include items such as property management fees, utilities, property taxes, property insurance, maintenance costs, and repairs. However, one notable type of cost excluded in the calculation is financing costs, like mortgage payments and interest, as well as income taxes paid to the government.

The formula to compute the effective gross income (EGI) and the net operating income (NOI) are as follows.

Effective Gross Income (EGI) = Potential Gross Income (PGI)  Vacancy and Credit Losses
Net Operating Income (NOI) = Effective Gross Income (EGI)  Direct Operating Expenses

Learn More → Effective Gross Income (EGI)

Q. What is the Loan-to-Value Ratio (LTV)?

The loan-to-value ratio (LTV) measures the risk of a real estate lending proposal by comparing the requested loan amount to the appraised fair value of the property, securing the financing.

Loan-to-Value Ratio (LTV) = Loan Amount ÷ Appraised Property Fair Value

The loan amount is the size of the financing offered by the lender, while the appraised property value is the estimated fair market value (FMV) of the property as of the current date.

Generally, the lower the loan-to-value ratio (LTV), the more favorable lenders will perceive the financing request (and the more borrower-friendly the terms will be).

The maximum loan-to-value ratio (LTV) is usually in the proximity of 75%, which restricts the loan size, i.e. places a “ceiling” on the borrowing to minimize the risk associated with the financing.

Learn More → Loan to Value Ratio (LTV)

Q. What Does the Loan-to-Cost Ratio (LTC) Measure?

The loan-to-cost (LTC) underwriting metric in the real estate industry is the ratio between the total size of a loan and the total development cost of a real estate project, expressed as a percentage.

The loan-to-cost ratio (LTC) formula divides the total loan amount by the total development project cost.

Loan to Cost Ratio (LTC) = Total Loan Amount ÷ Total Development Project Cost

Since the LTC ratio is expressed as a percentage, the resulting figure must then be multiplied by 100.

The “Total Development Cost” includes the following cost categories:

  • Hard Costs → e.g. Construction Materials and Labor Costs, Site Work, Utilities Set-Up (HVAC), Landscaping, Parking Lot, and Paving Costs
  • Soft Costs → Architectural Design, Engineering Planning, Inspection and Permit Fees, Professional Services (Legal, Accounting Fees), Maintenance and Insurance Costs
  • Property Purchase (or Acquisition Cost) → Land Acquisition, Property Purchase Price
  • Operating Expenses (Opex) → General and Administrative (G&A), Property Management Fees, Payroll and Accounting, Sales and Marketing, and Advertising Spend

Learn More → Loan to Cost Ratio (LTC)

Q. How is the Debt Yield Calculated?

The debt yield is an underwriting metric that measures the risk associated with a real estate loan based on the estimated return received by the lender and the ability to recoup the original financing in the event of default.

To compute the debt yield, the net operating income (NOI) of the property is divided by the total loan amount.

Debt Yield (%) = Net Operating Income (NOI) ÷ Total Loan Amount

The debt yield can be considered the estimated return that a lender expects to earn relative to the original loan provided to the borrower under the hypothetical scenario of default, i.e. failure of the borrower to fulfill the agreed-upon lending obligations.

Since non-operating costs like financing costs (e.g. mortgage payments, interest) and income taxes paid to the government are not included in the net operating income (NOI) metric, the debt yield is an unlevered, pre-tax metric (and is capital structure neutral).

Learn More → Debt Yield

Q. What is the Operating Expense Ratio (OER)?

The operating expense ratio (OER) measures the percentage of a property investment’s gross income allocated to pay off its operating expenses.

To calculate the operating expense ratio, the property’s operating expenses are divided by its gross operating income (GOI), and then multiplied by 100 to convert the output in decimal notation into a percentage.

Operating Expense Ratio (OER) = Total Operating Expenses ÷ Gross Operating Income (GOI)

Where:

  • Operating Expenses (Opex) → The property operating expenses include costs such as property management fees, maintenance fees, repairs, property insurance, property taxes, and other costs like utilities incurred from managing the property.
  • Gross Operating Income (GOI) → The gross operating income (GOI) is the total income generated by a property before deducting expenses. The GOI metric is composed mostly of rent payments collected from tenants, followed by other sources of income earned on the side, such as application fees, parking permits, amenities fees (e.g. gym access), and other on-premise services.

Generally speaking, a lower operating expense ratio (OER) implies the property is efficiently managed.

In contrast, properties with a high operating expense ratio (OER) often see a significant percentage of their income allocated toward operating expenses.

Learn More → Operating Expense Ratio (OER)

Q. What is the Difference Between a Capital Lease and an Operating Lease?

The difference between a capital lease and an operating lease is as follows.

  • Capital Lease → In a capital lease (or “finance lease”), the lease contract allows the lessee to acquire ownership of the leased asset. Because the lessee acquires full control over the asset, including maintenance needs and associated ongoing expenses, GAAP accounting standards mandate the recognition of the lease as an asset. On the other hand, a corresponding liability must be recorded on the balance sheet, and the interest expense tied to the lease is recognized on the income statement.
  • Operating Lease → In contrast, an operating lease is an agreement in which the ownership of the assets remains with the lessor, including the associated responsibilities. The lessor, rather than the lessee, is responsible for any asset-related costs, such as maintenance needs. Unlike a capital lease, an operating lease does not require the lessee to recognize the leased asset on the balance sheet.

Learn More → Capital Lease vs. Operating Lease

Q. What is the Equity Multiple?

The equity multiple in real estate refers to the ratio between the total cash distribution collected from a particular property investment and the initial equity contribution.

Equity Multiple = Total Cash Distributions ÷ Total Equity Contribution

Where:

  • Total Cash Distribution → The cash “inflows” earned by the investor across the holding period of the property.
  • Total Equity Contribution → The cash “outflows” incurred by the real estate investor across the investment horizon, such as the land or property purchase price.

General Rules of Thumb:

  • Equity Multiple = 1.0x → If the equity multiple equals 1.0x, the investor is at the break-even point regarding profitability (total cash distribution = total cash contribution).
  • Equity Multiple < 1.0x → If the equity multiple is sub-1.0x, that outcome is unfavorable because the investor received less cash than the initial investment amount (and thus incurred a loss).
  • Equity Multiple > 1.0x → If the equity multiple exceeds 1.0x, the investor recouped their original investment in full, and any incremental cash distributions beyond the breakeven represent “excess” returns.

The equity multiple answers the question, “How much in cash distributions was retrieved per dollar of equity invested?”

For instance, a 2.0x equity multiple implies the investor earned $2.00 per $1.00 of equity invested, i.e. the initial investment doubled in value.

Learn More → Equity Multiple

Q. What is the Difference Between the Gross and Net Rental Yield?

The rental yield in real estate compares the rental income produced by a real estate property to its market value as of the present date, expressed in percentage form.

To calculate a property’s rental yield, a real estate investor must determine the property’s rental income, operating expenses, and appraised property value.

  • Rental Income → The rental income is the profits generated by a property per year that belong to the owner from renting out the property (or units) to tenants.
  • Operating Expenses → The ongoing operating expenses incurred by the property owner, such as property management fees, property insurance, property taxes, and repair costs.
  • Property Value → The property value refers to the current market value of the property, i.e. the fair value as of the present date.

There are two distinct types of rental yield metrics:

  1. Gross Rental Yield → The gross rental yield is the rental income of a property relative to its property value, without consideration toward operating expenses such as property management fees, repairs, or vacancies. While more convenient and less time-consuming to calculate, the gross rental yield is more of a quick method to estimate a property’s potential profitability, rather than to provide a comprehensive picture of the property’s profit potential on a more granular level.
  2. Net Rental Yield → In contrast, the net rental yield is virtually identical to the gross rental yield, except for accounting for the property expenses incurred in the day-to-day operations. The net rental yield, compared to the gross rental yield, offers a more accurate measure of a property’s true profitability.

To calculate the rental yield, a property’s rental income must be divided by its current property value.

Net Rental Yield (%) = (Annual Rental Income Operating Expenses) ÷ Property Market Value
Gross Rental Yield (%) = Annual Rental Income ÷ Property Market Value
Learn More → Rental Yield

What are Examples of Questions to Ask the Interviewer?

In practically all real estate interviews, the final question asked is, “Do you have any questions for me?”

The general rules to follow here are as follows:

  • Avoid asking questions that can be easily Googled – for instance, “What is the firm’s investment strategy?”
  • Do not ask a question answered earlier by the interviewer, as that shows you were not paying attention.
  • Ask personal questions – people enjoy sharing their unique career path – but do not cross the fine line between a “personal” question and an “intrusive” question.
  • Each question is an opportunity to start a conversation, so ask open-ended questions, not those that can be answered with “Yes” or “No” or a quick response.

We can summarize open-ended questions to ask an interviewer into five buckets:

  1. Background Questions → Career Path, Interest in Real Estate, Interviewer’s “Story”
  2. Experience Questions → Past Experiences Working in the Real Estate Industry, Memorable Investments, Lessons Learnt
  3. Firm-Specific Questions → Firm Culture, Workflow, Past Investments / Projects
  4. Industry Insights → Current Investing Themes, Sector Outlook, Trends
  5. Career Advice Questions → Recommendations to Perform in Role, Career Guidance and Tips

Some examples of questions to ask the interviewer are the following.

  • Q. “Could you tell me more about your career path?”
  • Q. “How has your time working in the real estate industry and this firm been to date?”
  • Q. “Which specific tasks or responsibilities of your job do you enjoy the most?”
  • Q. “If you don’t mind sharing, what are some of the near-term and long-term goals you hope to achieve?”
  • Q. “For which reasons did this firm and strategy appeal to you when recruiting?”
  • Q. “Which specific trends in the real estate industry are you most optimistic about?”
  • Q. “Do you have any contrarian predictions on the outlook of the real estate industry?”
  • Q. “Hypothetically, if you could go back to when you were still getting your undergraduate degree, which advice would you give yourself?”
  • Q. “Since joining the firm, what are some of the most valuable lessons you’ve learned since joining this firm?”
  • Q. “What do you credit your past achievements to?”
  • Q. “Given my past experiences, which areas would you recommend I spend more time on improving upon?”

The pattern in the questions asked to the interviewer should be clear. Each question should be asked respectfully, show genuine interest in the interviewer’s background, and ask for career advice.

Based on the specific interview, pick a couple of questions that make the most sense to ask, i.e. be sure to “read the room”, and remember to ask follow-up questions to show that you are listening.

In addition, frame each question (and any follow-up questions) to show that you are here to learn and value the insights provided by the interviewer, but make sure not to come across as disingenuous in expressing your desire to learn more about their background and career advice.

Real Estate Interview: How to Prepare for Modeling Tests?

Currently, most reputable real estate investment firms, especially real estate private equity firms (REPE), have integrated modeling tests into their interview process in 2023, which has gradually become the industry norm.

The modeling tests can range from a 1-hour, on-site test to a take-home case study, in which the candidate is granted a few days to complete the project.

To perform effectively on the modeling tests, ensure competence in the following topics:

  • Common Excel Functions and Shortcuts
  • Real Estate Financial Model Architecture (“Best Practices”)
  • Pro Forma Cash Flow Build and Amortization Table
  • Joint Venture (JV) Waterfall Schedule
  • Exit Returns Analysis with Sensitivity Analysis

A take-home case study assignment is not merely a modeling test, but rather a trial run for the firm to form an opinion on the candidate’s investing acumen and judgment.

The candidate often delivers an in-office presentation soon after to pitch their investment thesis.

Hence, the take-home case study is only provided to viable candidates in the final stages of the process, right at the cusp of receiving an offer.

  • Investment Property Overview and Transaction Summary
  • Formal Investment Recommendation (“Invest” or “Pass”)
  • Investment Merits and Risks (and Mitigating Factors)
  • Financial Highlights (Summary of Recent Operating Results)
  • Market Analysis (Competitive Positioning, Geographical Trends, Outlook)

In conclusion, we wish you the best of luck with your upcoming interviews and hope our real estate interview guide was a helpful resource!

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