Technical Questions

In most technical interviews I have had, I am usually asked about simple IRR, Cash on Cash, and Equity Multiple questions. Also asked about cash flow levels, what's included or not in NOI, what is included in CapEx funding, what what you include in area maintenance. What is included in triple net leases (only been asked when I brought the lease up). Also normally asked some brain teaser.

Example:

You buy a property for 100mm with a cap rate of 5%. You hold for 5 years, assume acquisition is year 0 and you collect rents for five years from year 1-5. You sell the property at the same cap rate you entered in.

What is your NOI? 5% of 100mm is 5mm per annum.

What is your sale price? Well year 5 NOI is 5mm and you exit at 5% cap rate, 5% is 5/100 which is 1/20, Multiply by the reciprocal so 5x20 is 100. You sell for 100mm.

What is your equity multiple? 100mm out, 5 years of rent is 25 years and then 100mm in, so 125/100 is 1.25x.

What is your IRR? IRR is your internal rate of return, if you have a stable return of 5% (your cap rate) per year with same exit as entrance, your IRR is 5%.

Now let's make it harder. You have a loan for 60% of the purchase price with an interest rate of 5%. Interest is paid annually and loan is paid off through sale receipt.

What is your equity? 100m x 60% = 60mm loan, 100mm-60mm = 40mm.

What is your levered cash flow? 5mm NOI - 3mm (60mm loan x 5% interest) = 2mm per annum.

What is your Equity Multiple? 40mm out, 10mm (2mm for 5 years), 40mm in = 50/40 = 1.25x.

Why is your EM the same as pre-levered levels? The interest is at the same rate as the cap rate which means your EM and IRR will maintain the same levels. Debt is only accretive if the rate is below your yield (cap rate).

And then I would expect them to lower or raise the interest rate and answer again. 

Example 2: Property A makes 10mm after a 5 year hold off of sales price. Property B makes 10mm over 3 years through rent but doesnt make any upside on the sale. Which Property do you want?

I said Property B because you get the same return sooner so you have less discount from inflation. 

Example Braintease:

What degree is the minute hand at 3.15?

What is 9% of 9 and 7% of 7?