Real Estate Industry/Technical Questions Flashcards
Explain a cap rate? How do you find them?
- NOI / Purchase Price
- Quick and easy way to approximate value of a real estate deal without having to do a complex multi-year pro-forma model and make a bunch of assumptions of the operations of the property in the future
- Higher cap rate does mean a higher yield, but not mean there is greater profitability
- Investors are willing to accept a lower cap rate (yield) if they expect the income of the property will be significantly higher in the future
- A higher cap rate is more attractive if there isn’t significant income growth potential
- Low cap rates in coastal, supply constrained markets because there is an expectation of significant future rent growth. High cap rates in low-density middle America markets where supply can outpace demand.
- Value-add deals tend to be found on the lower end of the cap rate spectrum since the going in NOI can increase quickly though re-leasing and renovation efforts raising rents on the property
- Market cap rates can be found on CoStar
- The riskier an asset the higher the cap rate
How do interest rates affect cap rates? Where are cap rates going?
- Conventional wisdom says a rise in interest rates results in a rise in cap rates because the cost of borrowing increasing which lowers expected IRR. Therefore, in order to hit target IRR’s, investors will drop their purchase price which results in the increase of cap rates.
- NOTE: Increase in interest rates DO NOT affect NOI because NOI does not account for debt service/capital structure decisions.
- Specifically for multi-family, it’s possible in our current environment with inflation and high home prices that a rise in interest rates won’t move cap rates from historical lows because borrowers may be more hesitant to buy homes at a higher interest rate and will opt to rent instead. That demand in rent potential will keep purchase prices high because investors expect a growth in future NOI.
What markets would you invest in?
2022 emerging trends report from the Urban Land Institute ranked top markets
1) Nashville, TN
- ranked #1 for overall investor demand
- ranked #2 development/redevelopment opportunities and local economic strength
- ranked #3 for availability of debt/equity capital
- No state income tax, driving companies and individuals to the metro
- Kaiser Aluminum (1.3 billion dollar manufacturing company) moving headquarters from California
- Oracle closed on 60 acres of land to build $1.2 billion dollar campus creating 8,500 jobs
- 1.6% annual projected 5-year employment growth
- 1.3% annual projected 5-year population growth
2) Raleigh, NC
3) Phoenix, AZ
4) Austin, TX
5) Tampa/St. Petersburgh, FL
What is your favorite and least favorite building/s?
Favorite: Frost Bank Tower, Austin TX
Perfect balance of traditional and modern architecture
What return metrics do investors care about?
- Cap Rate
NOI / Purchase Price - IRR
AVERAGE ANNUAL RETURN. The IRR is an annualized, time-weighted rate of return that investors can use to compare real estate investments to other potential investment vehicles like stocks, bonds, and other private equity investments - Cash-On-Cash Return
An annual net cash flow number divided by the equity invested in the deal. - Equity Multiple
sum of all positive cash flows / sum of all negative cash flows. It’s the calculation of the equity investment of the real estate investor and how many times over makes on their equity contribution
What is a recent deal you worked on?
161 Street, Lawrence, MA
- 6 Units, average condition
- $770k total, $128k per unit
Explain how to analyze a market?
- Low cost of living
- Tax friendliness
- Warmer climates
- Supply constraints
Why do you want to work in real estate?
I really enjoy the direct impact real estate makes on the community. We get to improve people’s quality of life and transform our towns and cities to be more beautiful.
Tell me about your duplex investment?
- $250k all in max after renovations so we can achieve the 1% rule (rent per month should be 1% of the purchase price). Property must rent $2500 per month. Any difference from the all-in will be used toward renovations
- Torrington, CT rent ranges 1k-1.2k
- $50k down all in ($25k each)
- 18 Eagle St, Torrington, CT - fell through! :(
- It was fully leased and in turn-key condition. Sold for $220k to a cash buyer
- Investing in Torrington because we are betting as affordability becomes an issue more people will move down state.
- We stay away from any properties with structural problems like the septic, roof, driveway
- Don’t want to do extensive renovations…just paint the walls, vinyl flooring, new appliances.
How do you find real estate deals?
- Deals come from Brokers, Banks, and Owners
1) Facilitate relationships with brokers so they contact you before deal hit the market
2) Contact property owners of distressed properties though cold-calling or direct mail
3) Online listings such as CoStar or Craigslist
What factors drive multi-family properties?
- PEOPLE and what they are doing
- Home Values
- Income
- Schools
- Jobs
- Weather
- Economy
What will happen to pricing if interest rates rise?
Technically speaking pricing should decrease if rates rise because borrowing costs will increase and buyers will reduce their purchase price to achieve a desired yield. However, in this inflationary environment investors are hungry for yield and a rise in interest rates may not have an immediate affect on pricing.
What events might cause cap rates to rise in the future?
x
Is multi-family a good investment right now?
x
What happens to property values when cap rates increase/decrease?
Property Value = NOI / Cap Rate
Increase in cap rate = decrease in value
Decrease in cap rate = increase in value
