Real Estate Fundamentals

Real Estate 101

1. Asset Classes

1.1 Traditional Asset Classes

  • Multifamily

  • Industrial

  • Retail

  • Office

  • Hotel

1.2 Niche Asset Classes

  • Self Storage

  • Manufactured Housing

  • Single Family Rentals

  • Industrial Outdoor Storage (IOS)

  • Data Centers

2. What's a Cap Rate?

2.1 Qualitative Definition

  • The cap rate generally represents the risk profile of a deal.

  • It also reflects the unlevered yield that a real estate investment might generate.

2.2 Quantitative Definition

  • The formula for calculating a cap rate is:

    • \text{Cap Rate} = \frac{\text{Net Operating Income (NOI)}}{\text{Property Value}}

2.3 Tips for Using the NOI Triangle

  • To utilize the NOI triangle effectively:

    • Cover the variable you are trying to find and perform the calculations with the remaining two variables.

    • Example Calculations:

    • If you cover NOI: Multiply cap rate by property value to find NOI.

      • Formula: \text{NOI} = \text{Cap Rate} \times \text{Property Value}

    • If you cover property value: Divide NOI by cap rate to find the property value.

      • Formula: \text{Property Value} = \frac{\text{NOI}}{\text{Cap Rate}}

2.4 Other Aspects Influencing Cap Rates

  • Inherent risk of individual property.

  • Opportunity cost of capital.

  • Growth expectations of the property’s future cash flows.

3. Key Players in Real Estate

3.1 Owner / General Partner (GP)

  • This party owns the property, makes key decisions, and is responsible for operating and executing the business plan.

3.2 Tenant

  • The individual or company that rents space in the building and pays rent to the owner.

3.3 Lender

  • The bank or institution that provides debt financing secured by the property and receives interest payments.

3.4 Broker

  • The intermediary who helps buy, sell, or lease the property and earns a commission for facilitating the transaction.

3.5 Property Manager

  • The firm or person responsible for the day-to-day operations, such as rent collection, maintenance, and tenant relations.

4. Interview Thinking Questions

4.1 Valuation Comparison

  • Two identical buildings are opposite each other. Why might one be valued higher than the other?

4.2 Tenant Comparison

  • Would you rather have 20 tenants in a building or 1 tenant, given that the tenant is Apple?

4.3 Investment Decision

  • Suppose you had $100 million to invest in a real estate project. Where would you invest it and why?