GREA Interview

3 Financial Statements

Income Statement → Cash Flow Statement → Balance Sheet

What is NOI and how do you calculate it

Net Operating Income measures the income a property generates after operating expenses but before

debt services,

income taxes,

depreciation,

capital expenditures

NOI = effective gross income - operating expenses

What is cap rate?

A capitalization rate measures a property’s annual net operating income relative to its value or purchase price. It represents the property’s unlevered income yield based on NOI. You compare cap rates across similar properties and markets

Cap rate = NOI / Current market value

What happens to a property’s value when cap rates increase, assuming NOI stays constant?

The property’s value decreases because the value and cap have an inverse relationship

What is the time value of money?

The time value of money means that a dollar received today is worth more than a dollar received in the future because today’s dollar can be invested and earn a return. Real estate investors discount expected future cash flows to evaluate what an investment is worth today. This is the foundation of a discounted cash flow (DCF) analysis.

What is a cap stack?

A capital stack describes the layers of financing used to fund a real estate investment. Lowest layers get paid first, then the next, etc. Each layer has a different level of risk, priority, and expected return. The layers on top of the cap stack don’t get paid until the bottom layers are fully paid.

Order of Cap Stack (low→high)

1. Senior debt (commonly bank loans, corporate bonds, or commercial mortgages )

2. Mezzanine Debt (Private investors, PE funds)

3. Preferred Equity (Institutional investors, Private Credit funds)

4. Common Equity (General and Limited Partners)

What is LTV?

Why do lenders use it?

Loan-to-value measures the size of a loan relative to the property’s value. Lenders use it to asses leverage and collateral protection.

LTV = Loan Balance / Property Value x 100%

What is DSCR?

Debt service coverage ratio measures a property’s ability to cover its required debt payments using its net operating income. Annual debt service includes scheduled principal and interest payments.

DSCR = NOI / Annual Debt Service

What are three ways you can value a property?

Income approach, sales comparison approach, cost approach

• Income approach: value the property based on its income, commonly using direct capitalization (value = stabilized NOI / market cap rate) or discounted cash flow

• Sales comparison: analyze recent sales of similar properties and adjust for differences

• Cost approach: estimate the value of land plus the current costs to replace or reproduce improvements, less depreciation

What is cash-on-cash return?

Cash-on-cash return measures annual pre-tax cash flow relative to the initial equity investment

annual pre-tax cash flow / initial equity invested