“Mental” Returns Question(s)?
If you have an NOI of $3, $50 Value, 50%LTV, 4% rate, what’s the cash on cash. And how do you solve for this? Got hit with this in an interview and stuttered up lol.
also does anyone else have any “mental” math questions they’ve encountered in interviews and wanna throw out there? Want to be prepared for everything!
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wait NOI doesnt take into consideration interest.... how did you get $3 for NOI?
Should be 2/25 for 8% CoC
^this. Pretty safe to assume any loan in a question like this is I/O (always check so they know it occurred to you), because who is going to ask you to mentally compute an amortizing payment lol
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Angelo Gordon
Good luck. Great firm.
Was this for an associate position or analyst? NYC office?
Anyone else have any questions they got wrong that they haven’t seen before and may want an answer to?
I’ll throw in one that I fucked up, if anyone else can help me with the explanation that would be great
Acq 1
0- -100 (Purchase)
1 - +100 (Cash flow)
2 - +100 (Cash Flow)
3 - +100 (Cash Flow)
4 - +120 (Sale)
Acq 2
0 - -40 (land purchase)
1 - -50 (building dev)
2 - +100 (cash flow)
3 - +100 (cash flow)
4 - +120 (Sale)
why is acq 2 have a higher IRR?
I could be wrong but isn’t it obvious that it’s because 2 has an extra cash flow year?
Choice 2 doesn’t have an extra cash flow year it actually has one less
Are you sure you remembered the Q correctly? I'm getting 94% IRR for the first one, 70% for the second one
I could be misremembering but tbh I guessed when I heard the question and the dude interviewing me said I was right. Times 0 is acquisition if that makes a difference.
Assuming equity in Scenario 2 is going in for both the land purchase and building dev periods then you’d see a higher project level IRR as a result of spreading out your equity over the first two years as opposed to all up front. You don’t hit your peak equity until further into the project so basic time value of money rules apply. In scenario 1 the clock starts day 1, whereas in scenario 2 that clock is in theory pushed out a bit.
Now some investors might look at it differently and start the clock day 1 since they’re agreeing to commit their capital at that point but that’s a different discussion
Acq 1: IRR = 94%.
>
Acq 2: IRR = 70%.
I believe you are missing a part. The profits of both cash flows should be the same.
The exercise is that although profit is the same, you are deferring your capital (equity) investment/draw by one year in the second cash flow. IRR should be higher because Time Value of Money (dollar today is worth more than a dollar tomorrow)
Were you my interviewer 👀👀
Easier way,3 NOI, $50 value is a 6 cap
ROE (CoC) = (6% - 50% * 4%)/ (1-50%) = 8%
RoE = (Cap Rate - LTC% * Rate) / (1-LTC%)
Helpful. Thanks.
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