Wall Street Prep RE Qs + CRE

Question 1

What is the investment strategy of the firm?

Question 2

What types of properties does the firm invest in?

Question 3

What is the structure of the firm’s investments? (i.e. equity or debt)

Question 4

“What are the investment criteria of the firm?” (e.g. geographical focus, transaction size, risk/return profile, etc.)

Question 5

Explain one past transaction completed by the firm, and why you found it interesting?

Question 6

What is a Real Estate Private Equity (REPE)

Answer 6

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.

Question 7

Real Estate Investment Trusts (REITs)

Answer 7

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.

Question 8

Real Estate Development Firm

Answer 8

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.

Question 9

Real Estate Investment Management

Answer 9

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).

Question 10

Real Estate Operating Companies (REOCs)

Answer 10

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.

Question 11

Real Estate Brokerage Firms

Answer 11

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”.

Question 12

What are the Different Property Classes in Real Estate Investing?

Answer 12

Class A → “premium” properties, 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

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 D → Class D properties are the bottom-tier classification and consist of properties in poor condition, while located in areas with limited market demand.

Question 13

What are the 4 Main Real Estate Investment Strategies?

Answer 13

1. Core - Core investments are recognized as the least risky strategy and involve modern properties priority with core investments is stability in performance .and limiting downside risk.
2. Core Plus - marginally riskier than the core strategy aside from necessitating some capital improvements.
3. Value-Add: More risk because the properties need considerable capital improvements. Real estate investors implement significant improvements resulting in higher pricing and more market demand.
4. Opportunistic

riskiest strategy entails new development; time-consuming but also require substantial spending on resources.

Question 14

What is NOI in Real Estate?

Answer 14

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

NOI formula neglects non-operating items such as capital expenditures, depreciation, financing costs, income taxes, and corporate-level SG&A expenses.

industry-standard measure of profitability to analyze property investments, particularly for comparability purposes.

Question 15

What is the Difference Between NOI and EBITDA?

Answer 15

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 → NOI neglects non-operating items like EBITDA, however, from the perspective of a real estate property, not a corporation.

Industry-Usage → NOI is seldom recognized outside the real estate industry

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

Question 16

Depreciation Concept Nuance | Real Estate vs. Corporations

Answer 16

The depreciation concept is nuanced in real estate because unlike standard circumstances, 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.

Question 17

How is the Cap Rate Calculated?

Answer 17

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

Question 18

Explain the Relationship Between the Cap Rate and Risk.

Answer 18

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

Higher Cap Rates → Higher cap rates suggest property prices are low relative to the income generated.

Lower Cap Rates → 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.

Question 19

What Does Funds from Operations (FFO) Measure?

Answer 19

FFO used to analyse REIT; estimate the capacity of a REIT to generate enough cash.

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

Question 20

What is the Difference Between FFO and AFFO?

Answer 20

normalising FFO for items like non-cash rent and subtracting the recurring maintenance capital expenditures

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

Question 21

What are the 3 Methods of Appraising a Property?

Answer 21

Income Approach

property value = net operating income (NOI) / the market cap rate.

Sales Comparison Approach

Comparable properties to estimate the valuation of a property.

Cost Approach

“replacement cost”, the property value is estimated based on the total cost of replacing the property.

Question 22

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

Answer 22

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

Estimated Property Value = Forward NOI ÷ Market Cap Rate

Question 23

What is the Intuition Behind the Cost Approach?

Answer 23

no rational investor would pay more for a property than the cost of constructing an equivalent substitute with similar utilities and amenities.

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

Question 24

What Does the Cash on Cash Return Measure?

Answer 24

Cash on Cash Return (%) = Annual Pre-Tax Cash Flow ÷ Invested Equity

Annual Pre-Tax Cash Flow → metric is post-financing therefore is a “levered” metric.

Invested Equity → The original equity contribution on the date of property purchase, i.e. the initial cash outlay.

Question 25

What are Vacancy and Credit Losses in Real Estate?

Answer 25

downward adjustment applied to the potential gross income (PGI) of a property to arrive at the effective gross income (EGI)

Vacancy Loss → estimated losses incurred by rental properties left vacant. Usually projected as a percentage of the (PGI)

Credit Loss → losses incurred from a tenant who is unable to fulfill their rent payment obligations on time.

Question 26

What is the Gross Rent Multiplier (GRM)?

Answer 26

ratio between the market value of a property and the property’s expected gross annual rental income. Reflects the estimated number of years needed by a particular property’s gross rental income to pay for itself.

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

Question 27

How is the Yield on Cost (YoC) Calculated?

Answer 27

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

Question 28

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

Answer 28

EGI = PGI + Ancilliary Income - Vacancy and Credit Losses

NOI = EGI - OpEx

Question 29

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

Answer 29

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

Question 30

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

Answer 30

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

Total Dev. Costs:
Hard Costs, Soft Costs, Property Purchase (or Acquisition Cost), Operating Expenses (Opex)

Question 31

How is the Debt Yield Calculated?

Answer 31

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

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. debt yield is an unlevered, pre-tax metric (and is capital structure neutral).

Question 32

What is the Operating Expense Ratio (OER)?

Answer 32

measures the percentage of a property investment’s gross income allocated to pay off its operating expenses.

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

Question 33

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

Answer 33

Capital Lease → In a capital lease (or “finance lease”), the lease contract allows the lessee to acquire ownership of the leased asset. 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. 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.

Question 34

What is the Equity Multiple?

Answer 34

Equity Multiple = Total Cash Distributions ÷ Total Equity Contribution

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.

Question 35

What is a rental yield

Answer 35

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.

Question 36

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

Answer 36

Gross Rental Yield → The gross rental yield is the rental income of a property relative to its property value, without consideration toward operating expenses

Gross Rental Yield (%) = Annual Rental Income ÷ Property Market Value

Net Rental Yield → identical to the gross rental yield, except for accounting for the property expenses incurred in the day-to-day operations.

Net Rental Yield (%) = (Annual Rental Income – Operating Expenses) ÷ Property Market Value

Question 37

What are Examples of Questions to Ask the Interviewer?

Answer 37

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?”

Question 38

What is the RE Capital Stack

Answer 38

1. Common Equity - riskiest but uncapped upside
2. Preferred Equity - hybrid. Option to include fixed interest and participate in equity upside
3. Mezzanine Debt: Higher interest rate but lower priority
4. Senior Debt: Lowest interest, most significant, first priority

Question 39

What are the four phases of the real estate cycle?

Answer 39

Question 40

What factors influence the real estate cycle?

Answer 40

1. Recovery → Declining Vacancy Rates + No New Construction
2. Expansion → Declining Vacancy Rates + New Construction
3. Hyper-Supply → Increasing Vacancy Rates + New Construction
4. Recession → Continued Increasing Vacancy Rates + Excessive Supply in Market

Question 41

How is the vacancy rate of a commercial property determined?

Answer 41

High Vacancy Rate → Low Market Demand + High Attrition Rate in Existing Tenants
Low Vacancy Rate → High Market Demand + Low Attrition Rate in Existing Tenants

Question 42

Why is the cap rate the inverse of a multiple?

Answer 42

Cap rate is the inverse of a multiple because the net income multiplier (NIM) is the reciprocal of the cap rate.

Question 43

Compare the cap rates for the main property types

Answer 43

Question 44

Explain the relationship between the cap rate and risk

Answer 44

High Cap Rate:
- Riskier, potential, lower price, positive NOI growth

Lower Cap Rate:
- Lower risk, unfavourable market conditions, more secure, lower return

Question 45

What is the difference between the cap rate and cash-on-cash return?

Answer 45

Cap Rate: unlevered cash-on-cash return as of the original date of the acquisition. neglects the effects of financing.

Cash on Cash: levered metric as pre-tax cash flow affected by debt service as well as equity contribution

Question 46

How are property values and NOI multiples affected if the market cap rate rises?

Answer 46

Higher cap rates coincide with lower property values

Higher Cap Rate → Lower Property Value + Lower NOI Multiple
Lower Cap Rate → Higher Property Value + Higher NOI Multiple

Question 47

What are the 3 forms of depreciaiton recognised in RE appraisals

Answer 47

1. Physical Deterioration: Tangible wear and tear value loss
2. Functional Obsoelence: loss in value due to market shifts
3. Economic Obsolesence: loss in value due to external factors such as the local economy

Question 48

What GRM is a good value and how can you use it to calculate property value

Answer 48

most real estate investors target a gross rent multiplier (GRM) around 4.0x to 7.0x.

Gross Rent Multiplier (GRM) approach estimates the value of a property by multiplying the annualized rental income of a property by the GRM ratio.

Question 49

What is the difference between the yield on cost (YoC) and cap rate?

Answer 49

Yield on cost (YoC) is the forward-looking cap rate on property investments since the
computation divides the stabilized, “potential” NOI by the total project cost.

Stabilized NOI of a property is the pro forma NOI on an annualized basis after the new construction and property
development work is completed

Question 50

How does the composition of the total project cost vary by type

Answer 50

The composition of the total project cost varies by the project type:

Development Projects → predominately the purchase price and the developmental costs

Acquisition Projects → On the other hand, the spending on acquisitions is mostly maintenance, fixtures, renovations, and discretionary upgrades since acquired properties can start operating and generating income relatively quickly

Question 51

What are the common direct operating expenses deducted from the EGI

Answer 51

Property Management Fees
Property Taxes
Property Insurance
Maintenance Costs
Repairs
Utilities

Question 52

What are the main costs that NOI neglects

Answer 52

financing costs, federal income taxes, and capital
expenditures (Capex

Question 53

Difference between LTC and LTV

Answer 53

LTV compares to the property value
LTC compares to the total development cost

LTC typically preferred method for investing, LTV for acquisitions

Question 54

From the perspective of a lender, is a higher or lower debt yield preferred?

Answer 54

Lower Debt Yield → If the debt yield is on the lower end, the implied risk to the lender is higher because the property’s
operating cash flows might not meet the mandatory debt service.

Higher Debt Yield → In contrast, the higher the debt yield, the less risk the financing poses due to the reduced likelihood of
the borrower defaulting on the obligation.

Question 55

What does a higher or lower OER indicate

Answer 55

Lower Operating Expense Ratio (OER) → Higher Operating Profitability

Higher Operating Expense Ratio (OER) → Lower Operating Profitability

Question 56

What is a capital lease

Answer 56

• Allows lessee to obtain full ownership of the leased assets
• PV of lease payments capitalised as a fixed asset
• Corresponding liability recording interest on the lease on the income statement

Question 57

What is an Operating Lease

Answer 57

• Asset Ownership in lessor –> leased asset not on lessee’s balanced sheet
• Lessor responsiblt for asset-related costs, lease recognised as a liability on the lessor’s balance sheet
• Income statement recognises rental expense each period over the lease term

Question 58

Common non-operating expenses in Real Estate

Answer 58

Question 59

What is the IRR in RE investing?

Answer 59

Return that sets the NPV of Assets to 0, such that the PV of the intial investment is = the PV of the cash outflows

Main Sources are NOI Growth and Capital Appreciation

Question 60

How is the IRR function actually calculated

Answer 60

In Excel, the IRR can be determined via the “XIRR” function, which is composed of two arrays:

1. Range of Cash Flow → The net difference between the cash “inflows” and cash “outflows” per period.
2. Range of Dates → The specific timing of each cash flow, formatted as a date

Question 61

Difference between Levered and Unlevered IRR

Answer 61

levered IRR exceeds the unlevered IRR in practically all scenarios.

Greater the spread between the implied levered and unlevered IRR, the more reliant the returns are on debt to reach the target return.

Question 62

What is the difference between the going-in and terminal cap rate?

Answer 62

Going In: expected return on date of property stabilisation

Terminal: estimated return based on projected NOI and sale in the exit year

exit cap rate uses far reaching assumptions

Question 63

Ideal and conservative scenarios for the going in and terminal cap rates

Answer 63

Ideal: going in cap rate>terminal cap rate

Conservative: Terminal cap rate> going in cap rate

Question 64

How does cap rate compression impact property valuation?

Answer 64

Cap Rate Compression → Increase in Property Value (Higher Purchase Price)
Cap Rate Expansion → Decrease in Property Value (Lower Purchase Price)

lower cap rate can signifiy lower risk, but increaess risk of overpayng.

Ideal scenario: cap rate compression + NOI growth

Question 65

How does the interest rate environment impact property values?

Answer 65

Higher IR:

Higher cost of borrowing, reduction in demand, lower valuation –> cap rate expansion

one caveat would be if the supply remains insufficient to meet the current market demand, causing property prices to continue climbing upward even amid rising cap rates and in the face of rising interest rates.

Question 66

What are the three common commercial lease structures?

Answer 66

Triple Net (NNN), Full Service Lease (FS), Modified Gross Lease (MG)

Question 67

Describe the Triple Net (NNN)

Answer 67

• Tenant responsible for all prop. OpEx on top of base rent (incl. property taxes, insurance, maintenance and utilities)
• Rent is lowest
• Most common

Question 68

What is the full service lease (FS)

Answer 68

• Landlord responsible for all OpEx
• Rent is fixed and all inclusive
• More expensive

Question 69

What is the Modified Gross Lease (MG)

Answer 69

• Base rent has a prop. of OpEx while other relevant parties billed separately
• Limited standardisation

Question 70

What does the term “stabilization” refer to in property development?

Answer 70

Meets following criteria:
1. Occupancy Rate → The property (or units) are fully leased or leased near market occupancy.
2. Rent Pricing → The property rent prices charged to tenants are around the market rate.

Most work complete or close to completion, minimial cap ex.

Question 71

What is a good debt service coverage ratio (DSCR) in commercial real estate?

Answer 71

Therefore, real estate lenders often set a minimum DSCR covenant of around 1.2x to ensure the borrower is sufficient to service the debt burden, including a “cushion” to endure periods of underperformance.

The optimal debt service coverage ratio (DSCR) is widely recognized as 1.25x among industry practitioners.

The optimal DSCR ratio of 1.25x implies the property’s net operating income (NOI) is 125% of the total debt service.

Question 72

What is the net absorption rate?

Answer 72

measures the current supply and demand in the commercial real estate market (CRE).

The difference between the total amount of leased space, the amount of vacated space, and the amount of net space in a period is the net absorption rate.

Net Absorption = Total Space Leased – Vacated Space – New Space

Positive Net Absorption → more real estate was leased relative to the amount available on the market.
Negative Net Absorption → more real estate became vacant or was placed on the market relative to the amount leased.

Question 73

How does loan sizing work?

Answer 73

Determining appropiate debt burden supported by NOI. 3 ratios:

LTV, DSCR, Debt Yield

LTV Ratio → 70.0%
DSCR → 1.25x
Debt Yield → 10.0%

Question 74

What is the development spread used to determine?

Answer 74

compare the yield obtained from undertaking a real estate development
project to the yield earned on an acquisition of an existing property to determine if the development project is worth committing to from a monetary and time perspective

The greater the development spread, the more economically viable a proposed development project likely is

While there is no set industry benchmark for a “good” development spread, most property developers aim for a target development spread of 1.5% to 2.5% (or ~200 bps).

Question 75

What is breakeven occupancy in commercial real estate?

Answer 75

property’s minimum occupancy rate threshold to meet its Opex and DSCR, expressed as a percentage of occupied units.

occupancy rate at which a commercial property changes from an operating deficit to an operating surplus, i.e., the “inflection point.”

Question 76

If a property is a breakeven occupancy, what two criteria are valid

Answer 76

1. EGI = OpEx + Debt Service → If a property is in a state of breakeven occupancy, its effective gross income (EGI) will be
   equal to the sum of its total operating expenses (Opex) and debt service obligations.
2. DSCR = 1.0x → For properties at breakeven occupancy, their debt service coverage ratio (DSCR) will be precisely 1.0x.

a lower breakeven occupancy ratio is more favorable since there is
more of a “cushion” for unexpected underperformance.

standard range for the breakeven occupancy ratio in the commercial real estate market (CRE) is between 60% and 80%.

Question 77

What are the step to calculate the unlevered free cash flow of a property?

Answer 77

Unlevered Cash Flow = NOI – Capital Reserves – Capex – Tenant Improvements – Leasing Commissions

Capital Reserves → funds set aside for future Capex requirements and
capital improvements

Tenant Improvements (TI) → property upgrades made to the landlord to accommodate the unique requests of a specific tenant.

Leasing Commissions → fees paid to real estate agents or brokers

Question 78

What are the step to calculate the levered cash flow of a property?

Answer 78

Levered Cash Flow = Unlevered Cash Flow – Debt Service

Debt Service = Annual Mortgage Payments + Interest Expense

Question 79

Suppose a rental property has 100 units available for rent in total, of which 16 are vacant.

What is the property’s vacancy rate (and occupancy rate)?

Answer 79

Vacancy Rate (%) = 16 Units ÷ 100 Units = 16.0%
Occupancy Rate (%) = 1 – 16.0% = 84.0%

Question 80

Suppose a rental property generated $24 million in gross potential rent (GPR) and $1 million in ancillary income. If we assume vacancy and credit losses were 5% of potential gross income (PGI) while operating expenses were $3.75 million, what is the property’s net operating income (NOI)?

Answer 80

Potential Gross Income (PGI) = $24 million + $1 million = $25 million

Vacancy and Credit Losses = 5.0% × £25m = $1.25m

Effective Gross Income (EGI) = $25 million – $1.25 million = $23.75 million

The total direct operating expenses are $3.75 million, which we’ll deduct from effective gross income (EGI) to arrive at a net operating income (NOI) of $20 million.

Net Operating Income (NOI) = $23.75 million – $3.75 million = $20 million

Question 81

Suppose a rental property generated $100k in NOI, and the market cap rate is 8%.

Estimate the market value of the property as of the present date.

Answer 81

Property Value = $100k ÷ 8.0% = $1.25 million

dividing the annual NOI by the market cap rate, we estimate the property’s market value to be $1.25 million.

Question 82

Suppose the forward NOI of a property is $420k while the market cap rate is 6%. What is the implied property value?

Answer 82

Forward NOI = $420k
Market Cap Rate = 6.0%
Property Value = $420k ÷ 6.0% = $7 million

Question 83

Suppose a REIT reported $1.2 million in net income.

Calculate FFO given the following
adjustments: $800k D&A, $600k Gain on Asset Sale, $400k Loss on Asset Impairment, and
$200k in FFO Attributable to Non-Controlling Interest (NCI).

Answer 83

FFO = Net Income + D&A - Gain on Asset Sales + Loss on Asset Impairments - FFO attributable to NCI

Depreciation and Amortization (D&A) = $800k
Gain on Asset Sale, net = ($600k)
Loss on Asset Impairment, net = $400k
FFO Attributable to Non-Controlling Interest (NCI) = ($200k)

The “Gain on Asset Sale” and “Loss on Asset Impairment” are non-recurring so the gain is subtracted while the loss on asset impairment is added back to remove the effects

Funds from Operations (FFO) = $1.2 million + $800k – $600k + $400k – $200k = $1.6 million

Question 84

Calculate the AFFO of the REIT from the prior example assuming $400k in maintenance Capex and a downward adjustment of $100k in straight-line rent.

Past: Suppose a REIT reported $1.2 million in net income.

Calculate FFO given the following
adjustments: $800k D&A, $600k Gain on Asset Sale, $400k Loss on Asset Impairment, and
$200k in FFO Attributable to Non-Controlling Interest (NCI).

Answer 84

$1.6 million in FFO

Maintenance Capital Expenditures (Capex) = ($400k)
Straight-Line Rent Adjustment = ($100k)

AFFO = FFO - Maintenance CapEx - Straight Line Rent Adjustment

Adjusted Funds from Operations (AFFO) = $1.6 million – $400k – $100k = $1.1 million

Question 85

Estimate the value of an investment property expected to generate $200k in NOI at an 8% market cap rate.

Answer 85

Estimated Property Value = $200k ÷ 8.0% = $2.5 million

Question 86

Suppose a property was acquired for $100k at a 10% cap rate using 75% leverage with a 5% interest rate. What is the cash-on-cash return?

Answer 86

Net Operating Income (NOI) = 10% × $100k = $10k
Interest Expense = (75% × $100k) × 5.0% = $4k

Deduct the interest expense from NOI to calculate the levered pre-tax cash flow. Since there is no principal
amortization, assuming the loan is non-amortizing (i.e., interest-only) is reasonable.

Levered Pre-Tax Cash Flow = $10k – $4k = $6k

Equity Contribution ($) = 25% × $100k = $25k

Determine the cash-on-cash return by dividing the levered pre-tax cash flow by the initial equity contribution.

Cash-on-Cash Return (%) = $6k ÷ $25k = 25.0%

Question 87

Suppose a commercial building was purchased for $20 million using 80% leverage.

What is the required sale price to achieve an equity multiple of 2.0x?

Answer 87

Total Loan = $16 million
Initial Equity Contribution = $4 million

Required sale price is the sum of the exit equity value and total loan balance.
Sale Price = $8 million + $16 million = $24 million

Question 88

Suppose a rental property is currently on the market with an asking price of $1 million. Given a 5% cap rate and 50% leverage ratio, calculate the interest rate at which the breakeven point is reached

Answer 88

Net Operating Income (NOI) = 5.0% × $1 million = $50k
Total Loan Balance = 50.0% × $1 million = $500k

breakeven point is where NOI equals the interest expense

$500k × Interest Rate (%) = $50k
Breakeven Interest Rate (%) = $50k ÷ $500k = 10.0%

Question 89

Suppose a rental property generated $200k in potential gross income (PGI) with vacancy and credit losses expected to be 5.0% of PGI. If operating expenses are $90k while the annual
debt service is $40k, what is the cash-on-cash return if the equity investment is $750k?

Answer 89

Effective Gross Income (EGI) = $200k – $10k = $190k

Net Operating Income (NOI) = $190k – $90k = $100k

Annual pre-tax cash flow from NOI can be calculated by deducting the annual debt service

Annual Pre-Tax Cash Flow = $100k – $40k = $60k

Equity Invested = $750k
Cash-on-Cash Return (%) = $60k ÷ $750k = 8.0%

Question 90

Suppose a residential building has 50 rental units, and the monthly market rate rent is $4k. If the property’s market value is $12 million, what is the gross rent multiplier (GRM)?

Answer 90

Gross Rental Income = 50 Units × $4k × 12.0x = $2.4 million

(GRM) can be calculated by dividing the property value by the gross rental income

Gross Rent Multiplier (GRM) = $12 million ÷ $2.4 million = 5.0x

Question 91

Suppose a commercial property is expected to generate $800k in EGI and $320k in direct operating expenses at stabilization.

If the total development cost is $4 million, calculate the yield on cost (YoC).

Answer 91

Stabilized NOI = $800k – $320k = $480k

divide the stabilized NOI by the total
development cost to arrive at a yield on cost (YoC

Yield on Cost (YoC) = $480k ÷ $4 million = 12.0%

Question 92

Suppose a real estate investor acquired a property for $2 million that generated $300k in annual cash distributions for the next five years.

If the property is sold at the end of Year 5 at a sale price of $2.5 million, what is the equity multiple?

Answer 92

Property generates $300k in annual cash distribution from Year 1 to Year 5, which amounts to $1.5 million

Total cash distribution – the sum of each net cash flow (NCF), excluding Year 0 – is $4 million.

Equity Multiple = $4 million ÷ $2 million = 2.0x

Question 93

Suppose a property appraised at a fair value of $600k is acquired using 75.0% leverage.

What is the implied down payment by the investor and loan-to-value ratio (LTV)?

Answer 93

Mortgage Loan = 75.0% × $600k = $450k

Implied Down Payment = $600k – $450k = $150k

75.0% loan-to-value ratio (LTV)

Question 94

Suppose a commercial real estate investment firm is considering a potential development project to build an office building. The stabilized NOI is projected to be $5 million, while the
total development cost is around $47.5 million. What is the development spread if the market cap rate is 8%?

Answer 94

(YoC) by dividing the property’s stabilized NOI by the total development cost

Yield on Cost (YoC) = $5 million ÷ $47.5 million = 10.5%

Development Spread (%) = 10.5% – 8.0% = 2.5%

Question 95

Suppose a lender has set the maximum loan-to-cost ratio (LTC) at 80.0%. What is the required equity contribution if the total development cost is $40 million?

Answer 95

Equity Contribution = $40 million – $32 million = $8 million

Because there are no other funding sources, the $8 million represents the 20% equity investment necessary for the financing arrangement to be approved.

Question 96

Suppose a rental property has 40 units, and the current market rent is $4k monthly. What is the breakeven occupancy rate if the property’s total operating expenses and debt service
are $100k and $40k, respectively?

Answer 96

Potential Gross Income (PGI) = 40 Units × $4k × 12.0x = $160k
Total Opex + Debt Service = $100k + $40k = $140k

Dividing the total Opex and debt service by the PGI, breakeven occupancy ratio of 87.5%.
Breakeven Occupancy Ratio (%) = $140k ÷ $160k = 87.5%

Breakeven occupancy ratio multiplied by the total number of units to compute the number of occupied units
necessary for the property to reach its breakeven point.

Occupied Units = 87.5% × 40 Units = 35 Units

The product of the occupied units, market-rate rent, and annualization factor is $140k, equivalent to the total Opex and annual debt service, i.e., the property is at breakeven occupancy.

Effective Gross Income (EGI) = 35 Units × $4k × 12.0x = $140k

Question 97

Suppose a building expected to generate $10k in cash flow per year was acquired for $100k.

If the holding period was five years, after which the property was sold for $150k, what is the unlevered IRR?

Answer 97

e total cash distribution is $200k, while the equity contribution – assuming the purchase was funded using no debt – was $100k

MOIC is 2.0x

Since investment double in 5 years, estimated IRR is 15%

Question 98

If an investment doubles over 5 years, what is the IRR

Answer 98

15%

Question 99

If an investment doubles or triples in 1 year, what is the IRR

Answer 99

2.0x in 1 yr –> 100% IRR

3.0x in 1 Year –> 200% IRR

Question 100

If an investment doubles or triples in 2 years, what is the IRR

Answer 100

Doubles in 2 years –> 40% IRR

Triples in 2 years –> 75% iRR

Question 101

If an investment doubles or triples in 3 years, what is the IRR

Answer 101

Doubles in 3 yrs –> 25% IRR

Triples in 3 years –> 45% IRR

Question 102

If an investment doubles or triples in 4 years, what is the IRR

Answer 102

Doubles in 4 Years –> 20% IRR

Triples in 4 years –> 30% IRR

Question 103

If an investment doubles or triples in 5 years, what is the IRR

Answer 103

Doubles in 5 years –> 15% IRR

Triples in 5 years –> 25% IRR

Question 104

Suppose a property is purchased for $1 million at a 60% leverage ratio. The property generates
$50k in annual NOI across the 5-year holding period. If the investment is sold at the end of Year 5 at a
4% terminal cap rate. What is the equity multiple?

Answer 104

Cumulative NOI = $60k × 5 Years = $300k

Terminal Value = $60k ÷ 4.0% = $1.5 million

exit equity value determined by adjusting the terminal value by the debt paydown (“outflow”) and cumulative NOI (“inflow”).
Exit Equity Value = $1.5 million – $600k + $300k = $1.2 million

After dividing the exit equity value by the initial equity contribution, we arrive at an equity multiple of 3.0x, meaning that the investor’s equity tripled in size.

Equity Multiple = $1.2 million ÷ $400k = 3.0x

Question 105

Suppose a building was acquired at a 6% entry cap rate for $10 million. If the acquisition was funded using 60% leverage, priced at a 5% cost of debt, what is the DSCR in Year 1?

Answer 105

Net Operating Income (NOI) = $10 million × 6.0% = $600k

Annual Debt Service = 5.0% × $6 million = $300k

Debt Service Coverage Ratio (DSCR) = $600k ÷ $300k = 2.0x

Question 106

Compare the cap rates and risk profiles for each of the main property types.

Answer 106

highest cap rate (most risky) to lowest cap rate (least risky) – hotel, retail, office, industrial, multifamily.

Hotels highest cap rates because cash flow is driven by nightly stays (extremely short-term leases) and more operationally intensive activities like restaurants and conferences.

The creditworthiness of retail tenants is increasingly in question due to trends in e-commerce.

The office sector is closely correlated to the broader economy but has longer-term leases.

The industrial sector benefits from e-commerce trends, longer-term leases, and simple operations.

Multifamily is thought of as the safest asset class because no matter how the economy is performing, people will need a place to live.

Question 107

Walk through a basic cash flow proforma for a real estate asset.

Answer 107

Top line is revenue which will be primarily rental income and other revenue lines. Include deductions for vacancy and leasing incentives like rent abatements and concessions.

After revenues, you subtract all operating expenses to get to NOI. After NOI, you subtract any capital expenditures and account for the purchase and sale of a property. This will get you to unlevered cash flow. To get from unlevered to levered cash flow, you subtract financing costs.

Question 108

What is Implied and Actual Cap Rate: What is the difference?

Answer 108

Implied Cap Rate reflects a pro-forma estimate

Implied Cap Rate = Stabilized NOI ÷ Purchase Price

Actual Cap Rate = NOI at Exit ÷ Sale Price

Question 109

Common CRE Appraisal Methods

Answer 109

Question 110

Property Value by GRM

Answer 110

Property Value, Gross Rent Multiplier (GRM) = Annual Gross Rental Income × Gross Rent Multiplier (GRM)

That said, the operating expenses incurred by the property – e.g. property taxes, insurance, repairs or renovations, and utility bills – are neglected.

Question 111

What affecrs CRE Valuations

Answer 111

Question 112

Difference between Cash on Cash Return and ROI

Answer 112

Cash on Cash Return (%) = Annual Pre-Tax Cash Flow ÷ Invested Equity

ROI covers the entire holding period and accounts for debt and equity investments.

If debt financing was used as part of the transaction then the actual cash return on the investment diverges from the return on investment (ROI).

Question 113

Good Cash on Cash?

Answer 113

real estate market consensus is that a forecasted cash-on-cash return between 8% and 12% is considered a worthwhile investment.

Question 114

Optimal Capital Stack values of LTV, DY, DSCR

Answer 114

1. LTV - 75%
2. DY - 8 to 12%
3. DSCR -

Question 115

What is a Real Estate Waterfall

Answer 115

tier-based model for measuring the proper distribution of proceeds between a general partner (GP) and its limited partners (LPs).

pecking order via which the distributable proceeds of a fund (or “profits”) must be issued and the timing of each payoff is established by the equity waterfall.

Question 116

GP def.

Answer 116

General Partner (GP) → The general partner (GP), or “sponsor”, is the active manager of an investment fund responsible for deal origination (i.e. sourcing potential investments), performing diligence, and managing the properties post-acquisition

Question 117

LP Def.

Answer 117

Limited Partners (LPs) → The limited partners (LPs) are the capital providers of the fund. By committing capital to the fund, the LPs are passive investors, for whom the GP is investing.

Question 118

What is Preferred Return and Promote (Carried Interest)

Answer 118

Preferred Return (“Pref”) → Once the LPs are “made whole”, subsequent tier is the preferred return. Usually ranges between 6% to 8% on an annual basis

Promote (Carried Interest) → performance-based contingency payment and can be thought of as the reward earned by the general partner (GP) for meeting the pre-determined return target.

Question 119

Clawback Provision

Answer 119

The carried interest received by the General Partner (GP) that must be returned to the Limited Partners (LPs) from not meeting the minimum hurdle rate.

Question 120

Contribution

Answer 120

The distribution of capital by the Limited Partners (LPs) of the fund to fulfill a capital call request by the General Partner (GP) to fund an investment.

Question 121

American Waterfall (“Deal-by-Deal”)

Answer 121

The general partner (GP) receives carried interest on a per-investment basis, irrespective of the fund’s performance as a whole (or individual performance of other holdings).

Question 122

European Waterfall (“Whole Fund”)

Answer 122

The general partner (GP) collects carried interest only after the requirement for the original capital contributions, inclusive of fund fees and expenses, are returned in full to the limited partners (LPs) is met.

Question 123

Limited Partnership Agreement (LPA)

Answer 123

The contract between the general partner (GP) and limited partner (LP) to formalise the terms of the agreement, namely the profit share structure.

Question 124

What is the Catch-Up Provision

Answer 124

Catch-up provision:

investor receives 100% of all profit distributions until a predetermined rate of return is met. Once the investor attains the required return, all distributable proceeds are allocated to the sponsor. The investor (LP) receives a full share of the profit until a specified return is achieved under the catch-up provision, until the general partner (GP) reaches parity with the limited partners (LPs).

Lookback Provision:

The lookback provision provides a fund’s limited partners (LPs) with the right to “look back” and retrieve distributed profits back from the general partner (GP), even if the proceeds were issued to the GP. The rationale for the inclusion of the provision is that if the general partner (GP) is unable to generate a predetermined return for the limited partners, the LPs have the right to collect more proceeds to improve their poor returns.

The lookback provision offers sponsors with the option to allocate funds on investments, even if those proceeds must be returned later – hence, general partners (GPs) tend to view them favorably. In contrast, limited partners (LPs) prefer the catch-up provision, considering the receipt of an upfront payment without the need to request reimbursement from the sponsor at a later date.

Question 125

How to build a RE Waterfall

Answer 125

Step 1 → Quantify the Net Cash Flow (NCF) Available for Distribution (Sum of Levered Cash Flow, including the Purchase Outflow and Sale Proceeds)

Step 2 → Solve for the Minimum Cash Required to Meet Each Hurdle (Delta Between the Current and Prior Hurdle)

Step 3 → Input the Profit Split at Each Hurdle (Note: Profit Split ≠ Ownership Split)

Step 4 → Calculate the Cash Flow Attributable to Each Partner (Including Promote) at Each Hurdle

Step 5 → Multiply the Required Cash Balance at Each Hurdle by the Coinciding Profit Split

Step 6 → Reduce Net Cash Flow (NCF) Available for Distribution by the Cash Flow at Each Hurdle

If the model is adjusted properly, there should be no cash remaining to distribute after reaching the final hurdle.

Question 126

What is going in cap rate

Answer 126

Stabilised NOI / Total Project Cost

Question 127

What is Exit Cap Rate

Answer 127

Expected NOI / Terminal Value

Question 128

What is the Cap Rate Spread

Answer 128

Cap Rate Spread = Cap Rate (%) – 10-Year Treasury Yield (%)

Cap Rate comparable to expected return. Cap Rate (%) = Risk-Free Rate (rf) + Risk Premium

Question 129

Cap Rate Spreads Implications

Answer 129

High Cap Rate Spread → economy is likely underperforming, and will continue trending downward.

Low Cap Rate Spread → periods of economic stability, positive growth, and an optimistic near-term outlook among investors.

Question 130

How Do Rising Interest Rates Affect Cap Rates?

Answer 130

Rising Interest Rates → cost of borrowing increases in tandem, effectively reducing the purchasing power of market participants and the affordability of properties.

Declining Interest Rates → cost of borrowing declines, meaning there is more “cheap” capital readily available, which increases the purchasing power

Question 131

3 Fundamental components of cap rates

Answer 131

Risk-free rate
Change in NOI
Pure Risk Premium

Question 132

Definition of stabilised NOI

Answer 132

The stabilized NOI reflects a “steady state” level of operations.

property is fully operational, either in proximity or at its profit potential. Thus, stabilized properties are property investments in which the necessary (or discretionary) construction, repair, and renovation work is complete.

Stabilised property must exhibit an occupancy rate, indicative of the occupancy once the property is no longer under construction and fully operational.

Question 133

NOI vs EBITDA

Answer 133

NOI and EBITDA measure operating profitability

NOI intended for Real Estate properties –> add-backs to isolate real estate income generation such as excluding SG&A. NOI accounts for lost revenue caused by tenancy vacancies.

Question 134

What expenses does NOI eliminate

Answer 134

NOI eliminates the effects of these corporate-level expenses by isolating the core operating profits of the real asset in question, namely by excluding non-operating items such as depreciation, interest, taxes, corporate-level SG&A expenses, Capex, and financing payments.

Question 135

What is the NOI yield

Answer 135

NOI Yield (%) = Net Operating Income (NOI) ÷ Property Purchase Price

Question 136

What does the Purchase PRice in RE formulas include

Answer 136

The purchase price includes not only the cost of acquiring the property, but also any other transaction-related expenses like consulting fees, appraisal fees, etc.

Question 137

What does NOI yield contain compared to the cap rate

Answer 137

The NOI yield represents the annual rate of return received by a real estate investor based on the income generated by the property and the purchase price paid to acquire the property.

Unlike the cap rate, which is usually computed as the NOI divided by the market value of the property, the NOI yield is the annual NOI divided by the total purchase price.

Question 138

What are CFADS

Answer 138

Cash Flow After Debt Service

Question 139

Is NOI Yield a levered or unlevered metric, if so why?

Answer 139

Since NOI is an unlevered metric (rather than CFADS), the output reflects the unlevered yield on property investments

Question 140

Whats the difference between NOI Yield vs Cap Rate

Answer 140

cap rate calculated by dividing the net operating income (NOI) of a property by its current market value, whereas the NOI yield divides NOI by the total purchase price

Priority of the NOI yield is to understand the return attributable to income, as opposed to capital appreciation –> cap rate fluctuates based on market value whereas NOI yield remains constant

Question 141

How does the income approach treat the NOI of a Property

Answer 141

Treats it as a perpetuity; constant stream of cash flows disocunted using a hurdle rate based on market (cap rate; rate of return used as of present to capitalise future income into a market value as of the present date)

Question 142

What are the 3 assumptions that underpin the income approach

Answer 142

Long-Term Investors → The market participants purchase properties for their potential to generate future income and provide long-term benefits.

Rational Market → The investors in the market are rational in that the quality and quantity of the property’s anticipated income stream are closely considered.

Time Value of Money (TVM) → The time value of money (TVM)—the premise of fundamental intrinsic value—states that “a dollar today is worth more than a dollar received on a future date”.

Question 143

What are the common operating expenses deducted from the NOI

Answer 143

Common operating expenses deducted from net operating income (NOI) include the following:

Property Insurance
Property Tax
Maintenance Costs
Repair Fees
Utilities

Question 144

What is the Yield Capitalisation Method

Answer 144

1. Long-term projection with pro-forma NOI adjusted for vaacancy losses, credit and oeprating expenses etc.
2. Project till adjusted NOI Metric in the final year of the pro forma forecast
3. Final Year NOI divided by terminal cap rate (from comps)

Question 145

What is the Direct Capitalisation Method and how does it differ to Yield Capitalisation

Answer 145

Direct estimates value based on NOI produced in a one year time horizon. Project stabilised NOI and divide by appropiate cap rate

Implicit assumption that income and costs remain stable over a year, best method for properties with a track record. Yield methjod is suitable for volatile investments.

Question 146

What is the equaiton for property valuation via the cost approach

Answer 146

Propetry Value = Land Cost + Cost New - Accumulate Depreciation

cost approach estimates the value of a property based on the value of the underlying land on which the property was constructed, the replacement (or reproduction) cost, and the accumulated depreciation of the improvements.

Question 147

When is the cost method most used

Answer 147

When there is limited or no market data on comparable properties

Question 148

Step by Step Property Valuation via the Cost Approach

Answer 148

Estimate Land Value → Estimate the value of the land by analyzing recent sale data on comparable, vacant land parcels. Make discretionary investments case by case.

Estimate Replacement Cost of Improvements → Estimate the cost to reconstruct the property and improvements, inclusive of direct and indirect costs, either the square foot method or the unit-in-place method is used here.

Estimate Accumulated Depreciation → Estimate the depreciation expense, which pertains to the losses in property value from age, wear and tear, deterioration in building components, functional obsolescence, and external obsolescence.

Calculate Sum of Land Value and Depreciated Improvement Cost → The implied property value under the cost approach method equals the estimated land value, net of the accumulated depreciation cost tied to the improvements.

Question 149

What type of depreciation does the accumulated depreciation in the cost valuation approach include

Answer 149

Physical Deterioration → The tangible losses in property value from the “wear and tear” starting from the initial date on which the construction was completed.

Functional Obsolescence → The losses in the market value of a property due to factors such as subjective consumer preferences, technological innovations, or unfavorable shifts in market standards.

Economic Obsolescence → The losses in property value caused by external factors that pertain to the property’s location, such as the local economy and environment.

Question 150

What are the 2 definition of the ‘Cost New’ in the Cost Valuation Formula

Answer 150

Replacement Cost New → The replacement cost is the current amount it would cost to rebuild a property using current standards for construction material, layout, and design.

Reproduction Cost New → In contrast, the reproduction cost is the cost to rebuild the property using identical materials, design, and standards that were in place on the date of the initial construction.

Question 151

When is the direct capitalisation approach used, and what are the main drawback

Answer 151

direct capitalization method is most reliable for stabilized, income-generating properties, where there is more than sufficient market data to support the validity of the cap rate assumption.

drawback to the direct capitalization method is the implicit assumption that NOI (and operating costs) will remain constant, i.e. the stabilized NOI reflects the income of the property going forward.

With that said, the direct capitalization method is thus most suitable for properties that generate consistent income, where the projected NOI at stabilization is not too far-fetched (and is backed by historical data).

Question 152

What is the ARV (After Repair Value)

Answer 152

ARV = Purchase Price + Renovation Costd

Question 153

In what context is ARV used and how does it show return

Answer 153

Used in a value-add strategy; acquiring a property to raise the rent of an existing property through tangible improvements

If the impact on the pricing rate increases while the occupancy rate remains stable (or improves), then the after-repair value (ARV) of the property increases – all else being equal.

Question 154

Why must a value add investor first implement tangible improvements before raising the rental price

Answer 154

Else the renewal rate and occupancy rate would reduce as existing tenants will sign elsewhere

Question 155

In the ARV Formula, what is the sign of Renovation Costs

Answer 155

The value of renovations, on the other hand, is the sum of all repair, renovation, and related spending activities.

Note: While the cost of renovation is a cash outflow, the value of the spending is input as a positive figure here, rather than a negative integer.

Question 156

How Do Existing Tenants Impact the After-Repair Value?

Answer 156

If there are existing tenants at the acquired rental property, the new owner must first strictly abide by the tenants’ leasing agreements with prior management until the lease terms come to an end.

The rental payments from the occupied units can offset some of the foregone rental income, contributing a stable stream of income for the property owner while changes are made elsewhere.

Question 158

Yield on Cost (Development Yield) Formula

Answer 158

NOI / Total Project Cost

NOI - Proforma Annual Stabilised

Question 159

What is the Yield on Cost and Cap Rate difference

Answer 159

Cap Rate uses FMV while YoC uses Total Development Cost

YoC is essentially a forward looking cap rate

YoC carries more uncertainty since NOI must be stabilised and development work has not yet started

Question 160

What is the development spread

Answer 160

Difference between YoC (Going In Cap Rate) and market cap rate (going-out cap rate)

Development Spread (%) = Yield on Cost (YoC) – Market Cap Rate

Question 161

What is Yield on Cost method

Answer 161

YoC Metric is a “back-of-the-envelope” method to determine the trade off for a potential property development investment

Question 162

What is a Good Development Spread?

Answer 162

While there is no set industry benchmark for what constitutes a “good” development spread, per se, most real estate developers target a development spread of around 1.5% to 2.5%.

Question 163

What is the development yield

Answer 163

Stabilised Annual NOI / Total Development Cost

Essentially the potential ROI on a development project

Total Development Cost includes the cost of acquisition and development

Question 164

What is a Good Development Yield?

Answer 164

contingent on the investment type and amount of development occuring

Higher development yield is more attractive generally

Question 165

What is the difference between Development Yield and Cap Rate

Answer 165

The cap rate is the ratio between the annual NOI and the fair market value (FMV) of the property, whereas the development yield is the ratio between the stabilized NOI and total development cost.

development yield concept can be thought of as the “forward-looking” cap rate

Question 166

What is Loss to Lease

Answer 166

difference between a unit’s market rental rate and the actual rent stated on the signed lease agreement.

Loss is nominal rather than monetary

Loss to Lease (LTL) = (Market Rental Rate ÷ Actual Rental Rate) – 1

Question 167

Loss to Lease (LTL) vs. Gain to Lease (GTL): What is the Difference?

Answer 167

inverse of the “loss to lease” is termed the “gain to lease”

Question 168

What is Equity Multiple?

Answer 168

Equity Multiple = Total Cash Distributions ÷ Equity Contribution

Total Cash Distributions (“Inflows”) → The cash retrieved from an investment over the holding period.

Equity Contribution (“Outflow”) → The total equity investment contributed by the investor on the original date of purchase.

Question 169

Equity Multiple vs. IRR: What is the Difference?

Answer 169

Equity Muiltiple neglects the time value of money whereas the IRR does to makje the NPV of a projects cash flow to be 0

High IRR + Low Equity Multiple → A property investment could yield a high IRR, but a sub-par equity multiple if the timing and cash proceeds were received earlier, i.e. the earlier receipt of cash distributions can distort the IRR metric.

Low IRR + High Equity Multiple → Conversely, a property investment could have a high equity multiple, but a lower IRR if the cash flows are spread across a longer time span.

Question 170

What is a good Equity Multiple

Answer 170

Question 171

Equity Multiple vs. Cash on Cash Return: What is the Difference?

Answer 171

Cash on Cash Return – The cash on cash return is the ratio between the annual pre-tax cash flow the investor earns on property investment and the** invested equity in the coinciding period**, expressed as a percentage.

Equity Multiple – The equity multiple measures the total return on the investment and is calculated by dividing the total cash received by the total equity invested i.e. the cash received per dollar invested.

The cash-on-cash return offers a “snapshot” of the annualized return relative to the cash investment, with consideration toward only the cash income generated by the property.

On the other hand, the equity multiple is the ratio between the total return – from the initial purchase date to the exit date – relative to the equity invested.

Question 172

What is Net Rental Yield

Answer 172

Net Rental Yield (%) = (Annual Rental Income – Operating Expenses) ÷ Property Value

Question 173

Gross Rental Yield vs. Net Rental Yield: What is the Difference?

Answer 173

Gross Rental Yield → without consideration toward operating expenses such as property management fees, repairs or vacancies.

Net Rental Yield → accounting for the property expenses incurred as part of running the day-to-day operations.

Question 174

What is the implication of a higher rental yield

Answer 174

Generally speaking, a higher rental yield implies more profits and a better return on investment (ROI) in the property – all else being equal.

a rental yield between 5% to 8% is a decent starting point

Question 175

Common OpEx that the net rental yield factors

Answer 175

Property Management Fees
Maintenance Costs (Repair, Renovation, etc.)
Building Inspection Fees
Property Taxes
Property Insurance

Question 176

What is Levered IRR?

Question 177

Difference between Levered and Unlevered IRR

Answer 177

Question 178

Why does the levered IRR exceed the unlevered IRR in all cases

Answer 178

Debt financing means the equity contribution is lower thus a higher IRR

thus the return is lower for nearly any given investment

Question 179

What does the magnitude of the spread between levered and unlevered IRR signify

Answer 179

The greater the spread between the levered IRR and unlevered IRR, the more reliant the anticipated investment returns are on leverage.

Drawback to leverage is the potential downside risk created by placing a debt burden on the property.

Question 180

investment returns in cre come from which 2 sources

Answer 180

Cash Flow Growth → The growth in cash flow (or income) generated by a property stems from improvements in operating efficiency, in which more value is extracted from tenants (e.g. increase in rent prices). Further, there should be an expansion in the margin profile of the investment property, such as its NOI margin, from these initiatives to reduce costs.

Capital Appreciation → The capital appreciation concept refers to the value of an investment property increasing relative to the original purchase cost. Similar to achieving multiple expansion in LBOs, where the exit multiple is higher than the purchase multiple, the sale price at exit exceeds the acquisition price on the date of initial purchase.

Question 181

unlevered and levered cash flow formula

Answer 181

Unlevered Cash Flow (UCF) = Net Operating Income (NOI) – Capital Reserves – Capex – Tenant Improvements – Leasing Commissions

Levered Cash Flow (LCF) = Unlevered Cash Flow – Debt Service

Question 182

should you use leverage as a primariy investment strategy

Answer 182

If sufficiently meeting the minimum target return is contingent on the substantial use of leverage, the investment opportunity may be considered as riskier and might not be worth pursuing.

Simply put, using debt as a primary strategy to create value by itself is far riskier relative to plans to facilitate growth in net operating income (NOI) and capital appreciation from identifying favorable market trends or implementing improvements to properties.

Question 183

What is an Equity Dividend Rate

Answer 183

Equity Dividend Rate (EDR) = Before-Tax Cash Flow (BTCF) ÷ Initial Equity Contribution

annual cash yield received by an investor on a stabilized real estate property investment, after deducting financing costs.

Before-Tax Cash Flow (BTCF) → The pre-tax income of the property investment at stabilization. levered cash flow metric since the annual debt service, which includes principal amortization and interest, is accounted for.

Initial Equity Contribution → The equity investment on the date of the original property acquisition

Question 184

What is Real Estate Investment Payback Period?

Answer 184

Conceptually, the real estate payback period measures the recovery time in which the investment property remains unprofitable (and thus operates at a loss).

Investment Payback Period = Property Value ÷ Annual Return

Property Value → The property value, or total cost, is the total spend while completing the property investment, including the direct property-level expenses incurred across the holding period.

Question 185

What is a Good Payback Period in Real Estate Investing?

Question 186

What is GRM (Gross Rent Multiplier)

Answer 186

Gross Rent Multiplier (GRM) = Fair Market Value (FMV) ÷ Annual Gross Income

Question 187

What is Gross Income Multiplier?

Answer 187

Gross Income Multiplier (GIM) = Property Sale Price ÷ Effective Gross Income (EGI)

Property Sale Price → The stated selling price of the property that is currently on the market for sale.
Effective Gross Income (EGI) → The total income generated by the property across one year, prior to subtracting operating expenses.

Question 188

Gross Rent Multiplier (GRM) vs. Gross Income Multiplier (GIM)

Answer 188

Gross Income Multiplier (GIM) → In contrast, the gross income multiplier (GIM) is more inclusive since all forms of income generated by the property are factored into the metric rather than just rental income. Hence, the gross income multiplier is more frequently used in commercial properties with multiple streams of income.

Question 189

Net Income Multiplier (NIM)

Answer 189

Net Income Multiplier (NIM) = Property Purchase Price ÷ Net Operating Income (NOI)