When to use a DCF in REPE, and what types of modeling to know?
Apologies in advance for the amateur-ish question, just wanted to clear up something that I can't seem to get my head around.
When are DCFs actually used in real estate, and how relevant are they in REPE? I work in a development and acquisitions focused role, and I've only ever built underwriting models and development pro formas. My understanding is that a DCF is valuation focused (you’re discounting unlevered cash flows to figure out what the asset is worth today), while a typical underwriting model (cash flow + waterfall) is returns focused - is that right?
Also curious if interview modeling tests for REPE roles are usually underwriting scenarios, or if people ever get asked to do a pure DCF-style valuation.
Just want to make sure I’m not missing something fundamental. Are there any other types of "models" aside from the above, that could be asked for in a REPE role or interview? For context, I am just over 1 YOE and have only been asked to build these 2, aside from ad-hoc analysis.
Thanks everyone in advance.
It’s the same thing you should be able to get to both with the same cashflows. From my understanding hotel models usually use a DCF approach as do appraisers because it’s simpler. I’ll usually use a DCF when I need to solve to the same irr for a random analysis like value ing and abatement. Would be interested to hear other thoughts
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