Interview Question: “Would you prefer to rent a building or buy it?”
Full Q: “if you owned a business, would you rather rent a building or buy it? How would you go about calculating the returns on each one in order to compare the investment decisions?”
Follow Up Q: “How do you calculate the returns on your equity vs calculate the returns on purchasing a building?”
Let's say I own a business that is valued at call it ~10x EBITDA and I am deciding whether to rent or buy a building that has a 4% cap rate (it's a RE-specific metric but basically it's just the flip of EBITDA multiple i.e., yield-ish). So a 4% cap rate on this building is ~25x EBITDA.
If I decide to rent, that is an operating lease that flows through EBITDA - each $1 of rent costs me ~$10 in TEV (cause the business is valued at 10x EBITDA). If I buy, each $1 of rent that I save is going to cost me ~$25 (cause of that 4% cap rate) and it ties up my capital that could go elsewhere (and would hope that is earning >4%)
Someone who does a lot SLBs or RE can probably explain it better / fill in what I goofed
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