Interview questions
What is the most important variable in a real estate financial model?
In a real estate investments interview you will often be asked which variable has the greatest impact on a property’s performance.
By the CRE Modelling team
Asked straight, the answer on a ten-year hold is usually the exit cap rate, because the terminal value is half or more of the value in the deal, and a 50 basis point move in the exit cap can move the IRR by 150 to 250 basis points. How to set the exit cap rate works through it. Then show you know the other three.
1. Cap rate
- Small changes in cap rate can have a huge impact on the property’s valuation.
- As the cap rate rises, property values fall, so always consider market trends and the interest rate environment.
2. Rent growth assumptions
- Rent growth directly impacts NOI, and even slight adjustments can significantly affect IRR and cash-on-cash return.
- Base rent growth assumptions on solid market research and realistic forecasts.
3. Exit cap rate
- The exit cap rate is a key driver of your projected IRR, especially in value-add or opportunistic deals.
- Be cautious about aggressive exit cap rates: they overstate the projected returns.
4. Debt assumptions
- Interest rates and LTV ratios set the leverage, which in turn drives cash flow and the return metrics.
- Stress test the model under different debt scenarios to see how rising rates would affect the deal.
Mastering how to discuss these variables is crucial to acing your next real estate investment interview.