Almost a year back I wrote a post about real estate analyst interview; it mostly covered the questions being asked.
Many readers asked to provide the answer, but my job kept me busy and I was not able to write this post earlier. Thanks to Alexander Curry of Tarantino Properties, Inc, who wrote me an email providing in-depth feedback on the questions listed in the real estate analyst interview post. Because of Alex, I decided to write this post.
In this post, I'm going to answer the 10 most commonly asked questions in a real estate analyst interview.
If a project has zero NPV and the discount rate is 10%; what will be the project IRR?
By definition, IRR is the discount rate at which the project NPV equals zero. Hence the project IRR will be 10%.
What is the difference between rental yield and cap rate?
Rental yield is the net amount of money a landlord receives in rent over one year (after deducting operating expenses), shown as a percentage of the amount of money invested in the property.
So, Rental Yield = (Net Annual Rental Income / Cost) X 100
Note that rental yield is calculated on Net Operating Income without considering interest payment, tax, and depreciation.
Cap rate (or capitalization rate) is the ratio between the net operating income produced by a real estate asset and its cost (or current market value).
So, Cap Rate = Net Operating Income / Value (or cost)
If you notice, both rental yield and cap rate appear to be the same!
Rental yield is used to calculate the yield (return) of an asset whereas the cap rate is used to find the value (capitalized value) of an income-generating real estate asset.
What are the prevalent area measurement methodologies? Why should you use RICS and not BOMA?
RICS and BOMA are the two most commonly used area measurement standards in the industry. RICS is the area measurement standard from Royal Institution of Chartered Surveyors, whereas BOMA is the area measurement standard from Building Owners and Managers Association, USA.
Why should choose one over the other?
There can be various reasons, but we should go with the industry practice in our area of operation.
In mixed-use development how do you allocate the infra cost/land cost/service charge?
Infra cost and land cost can be allocated on the basis of gross floor area (GFA), net sellable area (NSA) or in proportion to the projected revenue.
Service Charges can also be allocated on a similar basis.
I personally prefer the allocation based on GFA as it makes life easier (for accounting reasons).
In calculating project IRR should we consider financing cash flow?
No, project IRR doesn't take into consideration the financing cash flows. Equity IRR does.
What is the impact of depreciation on the project IRR?
No impact. Project IRR is calculated on the basis of cash flow and depreciation is a non-cash flow item.
What are the best / worst-performing asset classes in the current market situation? Why one should invest in these assets or why not?
In any given market, one asset will be better performing than others. Assume in my area, the hotel is the worst performer and the residential is the best performer.
But a developer cannot just keep building residential assets, as soon oversupply will make it the worst performing asset.
Also, a large development cannot be successful without having a proper mix of various assets.
If you want to explore more product mix, please refer to the product mix optimization post.
Walk me through how you analyzed the last project you worked on.
As I pointed in the previous post, this question may lead to many others and it gives you an opportunity to tell your story.
I think you should think about the projects you have worked on and choose the most challenging one. Write a short note before the interview, covering the followings:
- Project description - location and size
- In what capacity you were involved in the project? Define your role and responsibility clearly
- Reporting structure
- What biggest challenge you faced on this project
- How you solved that challenge?
- What is the current status of the project?
It will be a good idea to write this one day prior to the interview so that you are clear in your mind, and can answer the questions with confidence.
How do you calculate the cost of equity?
The cost of equity is the return a firm theoretically pays to its equity investors. Capital Asset Pricing Model (CAPM) is the most commonly used method of determining the appropriate cost of equity. According to CAPM:
Cost of Equity, Re = Rf + b (Rm-Rf), where;
Re = Cost of Equity
Rf = Risk-free rate of return
Rm = The historical return of the stock market/equity market
b = is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
If you have to decide on a project's merit on the basis of only one performance indicator, which indicator will you choose?
Why? Because it is easiest to calculate and least prone to subjective judgment error.
Hope you enjoyed this post on the real estate analyst interview. Use the comment section below to add any more questions to the list.
i have a question regarding financial analyst can you tell me awnser
Thanks Garima for reaching out;
If you have any question, please post in our forum, I usually answer within 24 hours.
hie, my question is
Tanna Developers , a leading real estate entity, is thinking about investing in a piece of
land that costs Rs 85lacs, as the developer is very sure that next year the land will have
a value of Rs91 Lacs. The owner of the Tanna Developers approached Mr. Mihir Verma, a renowned financial analyst and requests him to advice on the same .Provided the interest rate in the bank is 10%.
a. Evaluate the proposal, as if, you are the financial analyst and recommend the
course of action to be taken by the developer.
b. Also, Calculate the NPV of the proposal.
i know about theses two options please suggest me
you have not give my answer
Garima; please use forum for such issues. It is very difficult for me to reply to individual comments. I hope you understand.
I was always told the NPV was the best indicator because there can be multiple IRRs for a project. Could you elaborate?
Hi, you mentioned that depreciation will have no impact on project IRR. So is project IRR calculated on EBITDA/operating income level? Because I think depreciation will have an impact on tax and on net income, hence will have an impact on IRR. Please suggest if otherwise.
Also, can you briefly describe difference in Project IRR and Equity IRR. Thanks