I have an upcoming interview for a Real Estate Investment Summer Analyst Position, but I have zero experience in Real Estate, I always was more focused on M&A and normal PE, so I am quite lost on technicals for RE. I would like to know what are the main valuation techniques used in Real Estate:
- DCF
- Direct Cap (including build-up method, Market Extracted Method, Band of Investment...)
- Gross Income Multiplier
What are other common valuation methods beyond those mentioned? Also, what sort of following up questions should I expect?
Leaving Valuation aside, what other questions should I expect?
Real estate is primarily valued by cap rate(NOI/Purchase Price). Some top-tier shops like BX and SW may use advanced methods like DCF or Replacement Value because they do more complicated deals. But 9/10, cap rate is what is used. What everyone typically looks at is the NOI line. That’s what drives the conversation usually.
Confused why he is being downvoted? I'm new like OP and have an interview coming up too.
Aren't the three valuation metrics:
1) DCF where you would model out a hold period, take future NOI to today (aka NPV of the investment) and cap it? For this you can also include IRR for how profitability the deal would be at that price and if it would make sense
2) Comparable sale analysis (self explanatory)
3) Take trailing 12 months NOI and cap it
I'm sure there's a better list somewhere that goes through main real estate technicals, but here's my quick spiel:
1. Valuation - at the simplest level yes, DCF/direct cap on forward/stabilized cash flows are the main way that institutional shops look at their deals. If it's a core shop/strategy that's probably fine, but if you're getting in to value-add/opportunistic people are going to focus on what the going in cap/pricing is (i.e., what's my yield if I do nothing), what the stabilized cap is (i.e., what's the project look like once I've done all my work) and what the spread/ROC is there between the two. And finally, what can yield can I convince someone to buy the improved asset at (i.e., what's exit cap).
2. Other metrics - you should probably know what Cash on Cash, DSCR, Debt Yield, and Equity multiples are and how to calculate them (none of these are hard, but the devil can be in the details). Pension funds (or at least the ones we work with) focus on TWRs, but my understanding is that's been put upon us because we're lumped in with PE/Hedge Funds, so you should probably already have some background in those. There are a bunch of others, but the first couple I mentioned are the main ones.
3. Other questions - typical questions I've given/seen are about judging between risk in product types and locations and how that affects yields/pricing. And you may get some sort of math question that asks you to calculate some of the metrics above (e.g., if I buy a building for $100 at a 5% cap rate, lever it with I/O, 3%, debt, what's my cash on cash)
Best of luck.
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