[Lev]

Their case study would likely involve processing raw data into an actionable LBO model. I presume you would be presented with a single-asset case with value-add upside. Perhaps there’s an office building in a secondary market that could use renovations. You might receive a ZIP file with rent rolls, T12 operating financials, all original lease docs, perhaps original debt docs if it’s not offered free and clear. You would then allot three hours to building the financial model, then another hour to designing your “results” presentation and reviewing your final data.

[Lev]

Working as a CMBS or RMBS trader could lateral you into the capital markets side of an REPE fund. From there, you could probably then seek to work toward investments if that’s your interest.

[Lev]

Ultimately the most important factor in developing your skill is deal flow. You need to see as many deals as possible as quickly as possible. This repetition will teach you not only the investments analysis, but all of the important fringe details like negotiating all of the legal phases of a deal, cultivating broker relationships, and learning to screen out duds so you can focus on the important deals.

If you work at a megafund, you’re almost guaranteed to see a lot of deals. You have a small piece of the total action, but it’s still going to be a lot of work.

If you work at a small shop, you will get a much larger piece of a smaller pie. If the shop is fundless, that is they raise for each investment, you will focus a lot more time on fundraising and less on investing. However, if the small shop has a fund, you will likely be the go-to person for all sorts of work.

In short, there’s a reason people target megafund experience. You get to see a wide spectrum of deals. However, you can become a key player very quickly in a small shop and get a lot of hands-on experience with elements of investing that you may miss out on at a megafund, like fundraising.

[Lev]

1. I’ve never encountered an equity multiple hurdle, but will research this
2. Yes, catch-ups and clawbacks are fair game. Those are not in my example waterfall. Per my earlier reply, will build a template for this.

[Lev]

I can produce both of those requests. I’ll prioritize this request above my other to-do’s. You can expect a deliverable within the coming two weeks, likely toward the end of that period. I’ll upload it and notify you here once complete.

[Lev]

Thanks for your watchful eye. The cash flows between the two videos “Forecast Entry and Exit Value” and “Forecast Real Estate Taxes” are the exact same. The forecast 6.6% UIRR was a holdover artifact from when I had just constructed the backend for the RE tax reassessment. When I went in to investigate your question, I checked that the model used for both videos had the same cash flows. When I refreshed, that 6.6% turned back to an 11%. I’ve carefully reviewed and revised the video to show the proper 11% return the entire time. Thanks!

Just a small note. It is good that you’re paying attention to the UIRR as we build the model, because it shouldn’t ever change unexpectedly. However, the UIRR is not meaningful until we’ve finished projecting all cash flows. I understand why you got hung up on this, but I assure you the continuity of the videos is sound and you can continue relying on the cash flows that you built.

Thanks for your watchful eye. The cash flows between the two videos “Forecast Entry and Exit Value” and “Forecast Real Estate Taxes” are the exact same. The forecast 6.6% UIRR was a holdover artifact from when I had just constructed the backend for the RE tax reassessment. When I went in to investigate your question, I checked that the model used for both videos had the same cash flows. When I refreshed, that 6.6% turned back to an 11%. I’ve carefully reviewed and revised the video to show the proper 11% return the entire time. Thanks!

[Lev]

Answers to your questions:

1. At best, the gap year won’t have a negative impact on your candidacy for a real estate private equity analyst job. At worst, people will question exactly why you took a year off from a decent job. To hedge against the worst case scenario, you need to spin your gap year experience in as positive a light as possible. You need to give as much evidence as possible that you are not a flight risk and will stick around for the long haul. You can prove that in two ways. First, don’t mention anything negative about your prior job, burnout, or lack of motivation. Rather, focus on positive elements. You’re dying to break into a real estate private equity career, you’ve spent the time off studying, you had some great volunteer experiences, you left your previous job on amazing terms and have a standing offer to return. Obviously, stick to the truth, but make sure your resume obviously paints a similar narrative so you are not screened out of the pack before you even make it to the real estate private equity interview process.
2. Yes, so long as you’re targeting the analyst role, prior experience is great. Doubly so if you have glowing recommendations from former colleagues.
3. Technical skills like Argus are great, but they won’t set you apart from the pack. Most of the resumes I review have Argus training. At my fund, the senior guys are most impressed by people who actually follow real estate private equity industry news and can speak to the market narrative. For instance, at my fund, we recently had to pick between two real estate private equity analyst candidates. One had excellent technical skills but didn’t sell us on their passion for real estate, and the other had decent technical skills (with clear potential to become excellent) but had an awesome investment thesis pitch and could speak to every REIT and each local real estate market. If you want to get to this level, I suggest reading through earnings call transcripts (available on SeekingAlpha for most major REITs) to get a sense for the competitive landscape, reading some of the real estate news sites mentioned in my post “What is it like being a real estate private equity analyst?,” and studying the rationale behind major recent deals.
4. Most real estate private equity analysts are between 24 through 26 years old, but there is no hard upper limit. I’d say just do not appear eager for a promotion. We nixed a candidate from our real estate private equity analyst interview process who was a bit more senior and who had mentioned an impending promotion twice during the interview. When a fund is hiring an analyst, they want to make that person is okay with that position for the proper amount of time. So don’t appear eager to be promoted above analyst, and make it clear that you’re excited for the work at that level.

Additional comments, I’d definitely continue to highlight your family’s deep connection to real estate. With your alternative, non-real estate professional background, you need to do all you can do to demonstrate a clear passion for real estate. You need to know the markets cold, and you need to demonstrate an innate passion for the industry. As a full-stop career switcher, make sure your narrative clearly demonstrates why you have always been passionate about launching a real estate private equity career and why now is the right time.

 

Happy to answer any follow-up you may have, or provide further clarity where necessary. Thanks for joining us here at Leveraged Breakdowns!

[Lev]

For posterity, here is a link to the case study that I reviewed, submitted by Caringpineapple.

Elements I Appreciate

1. I like your use of (+) & (-) to indicate addition and subtraction. That improves the readability of this model, which is an important judgment criterion.
2. You’ve made a great effort to visually isolate different sections using colored headers, borders, and font style.
3. Your math is generally correct and well laid out. I apprecaite your demonstration of the growth formulas under the respective cash flow lines.
4. I like the left-side margin you create with column A. It would make it even sexier if you made a similarly-wide column at the end of the page too, and delineated the print range with alt+p+r+s. This visually confines the space.
5. It’s great that you included this mortgage debt schedule. many real estate private equity case studies I review often leave this out and it irks a lot of people, especially those with debt backgrounds.

Elements I would Suggest Changing

1. Monthly cash flows are hard to read as a manager. Over your real estate private equity career, your superiors will appreciate your ability to speed their review. Thus, I recommend you create an annual cash flow summary of the relevant cash flow line items. No need to annualize the backup build-ups that don’t directly generate IRRs. Of course, link to your monthly IRR calculation. More on the proper XIRR formula below.
2. Your use of borders is a bit noisy. If you start putting everything into some kind of box, then nothing is in a box. Perhaps a nice grey fill can indicate your T12 financials against the roll-up, or space. You have more visual elements in your toolkit that can separate information for your reader.
3. I’m personally against using multiple lines to name my cash flows. For instance, you put “Revenue” in column B and “(+) Base Rental Income” in column C.
4. Why am I against this? Imagine this single-asset model you’ve built was one of many within a portfolio roll-up model. If you want to find out what all of your assets’ property management fees are, you would probably use a SUMIFS or INDEX-MATCH. These formulas would need to be awkwardly retooled to lookup on two columns of names rather than one.
   1. The solution I prefer is to tab out your names using alt+h+6. This is good for two reasons. First, you achieve the same visual effect without messing up your column of potential lookup keys. Second, alt+h+6 is pure styling. Thus, you dont’ need to make your CF name ”    (+) Base Rental Income” (note the four spaces). Why this may seem small, your lookup key may not include those four spaces. In that instance, you would miss this item with spaces in its name. Hopefully you would catch this with a global tie-out check, but why run the risk?
   2. If you’re adamant about using two columns, and need to perform a lookup in the future, I recommend tagging your cash flows in column A (or adding an additional column on the far left) with standardized lookup names with no spaces, such as base_rental_income
5. You’re missing a unit mix. While it might seem stupid for an apartment with just one type of unit, your buy-side interviewers (or colleagues) are likely used to seeing unit mixes. It is visually easier for them to interpret that information, and will make you appear like an insider.
6. Every single one of your cash flow lines has a $ preceding the figure. All financial professionals, real estate private equity investors or otherwise, follow the following rules when formatting cash flows:
   1. The first in a block of lines starts with $
   2. Subsequent lines within the block do not start with a $, rather are just numbers with commas
   3. Sumlines always have $
   4. Anything afer a sumline does not have a $
7. Your IRR formula should just be XIRR. Look up the docs on how to use it, it’s pretty straightforward.
8. You’ve grown your cap rate with a hardcoded +0.0005. This would be better as its own input, perhaps right above the cap rate schedule. Most real estate private equity investors I’ve worked with stick to a linear expansion rate, but others may disagree. This isn’t a huge issue, the way you’ve done it is also common.
9. Your “NOI for the final year” formula is not flexible. Use a SUMIFS on the year #. This will allow you to flex the exit date. Same thing for your exit cap rate lookup, this could be achieved with INDEX or SUMIFS (and a few others).

Neat Formulas / Tricks You May Not Be Aware Of

1. You’ve hardcoded your “Hold Period Year.” I hope you didn’t manually type every single number, that would be a waste of time. If you weren’t aware of this trick, try typing this formula into cell E26 of your vanilla model (the first instance of “Hold Period Year 1”): =IF(MOD(D25,12)=0,D26+1,D26). Respond in this thread with what you think this formula is doing that makes it count the years properly. How would you use it to count quarters?
2. Real estate private equity investors like to know what year/month they’re reading as quickly as possible. Sure, you’ve labeled the “Hold Period Month” & “Hold Period Year” off to the left. But the first direction a reader’s eyes will go is up when they are looking to confrim the year/month. Thus, I recommend you style every cell  to identify which month/year it is with more detail. More specifcially, highlight all of your Year cells. Hit ctrl+1, tab, end, tab, type in “Year “0 (use the quotes like me, type everything from ” to 0). Enter. Repeat for the months. If you need to copy and paste style, hit ctrl+c (copy) then alt+e+s+t (paste only style).
3. Type alt+w+v+g to hide the grid. Do you see all the excess borders you copied & pasted over? This would reflect poorly during a real estate private equity case study interview. Make sure you don’t include noisy formatting like this.

[Lev]

Thanks for sharing. I’m jammed up today but will review in the next day or two.

[Lev]

Your purchase price should be a plug that you solve for to achieve your IRR, as discussed in the REPE starter kit LBO module. You imply the entry cap rate using NTM NOI — this is standard practice across all CRE, not just REPE.

Your sales value is calculated by applying your exit cap rate to NTM NOI. For this case, we make no next-buyer adjustments. In Breaking Down REPE, we do cover a more nuanced case where taxes reassess at exit. Again, it’s industry standard to cap NTM NOI.

[Lev]

For Posterity, here is a link to the model that I reviewed for Jeowong.

Jeowong,

Great model, it shows a lot of promise. Some nits and observations below.

1. Row 27: break out your rent revenue between GPR & vacancy. Real estate investors like to see what your GPR & vacancy assumptions are separate from one another.
2. Row 28: Similar comment for Other Revenue — show the vacancy loss separately
3. Rows 30, 32: This is very minor. The mathematically proper way to turn an annual growth rate into a monthly growth rate would be =(1+r)^(1/12)-1. This is a bit more accurate than dividing an annual rate by 12.
4. Row 33: NOI is always inclusive of management fees. Also, REPE investors only ever use Economic NOI for multifamily, which is inclusive of capital maintenance reserves (the $400/yr metric quoted in the prompt). If you don’t know what Economic NOI is and why it’s important, refer to this post from Green Street Advisors, the premier real estate research outfit.
5. Rows 47 thru 53: Great find on the CBRE cap rate source. However, you should apply the cap rate to the economic NOI (inclusive of capex). Also, I’ve just updated my post to include an exit cap rate assumption to simplify since I figure it may be too much to ask students to derive their own cap rate like you did. Refer to the latest post, which reads:
   1. The T0 market cap is 4.5%, expanding at 5bps per year. The inflated exit cap is what you apply to your NTM exit NOI for GAV.
6. The index(range,COLUMN(cell),#) forumla is fancy, but could break if somebody added a column to the left of your model. Can you consider a safer way to build this formula?
7. Nothing explicitly wrong, but I prefer to separate my purchase & sale rows

Best,

Lev

[Lev]

OpEx should be applied to total units, not just occupied units. Don’t dig into this too much, it’s just a high level assumption on average. Generally speaking, it’s hard to scale the majority of OpEx items up and down with unit-level occupancy (personnel, repairs, building services, taxes, insurance, etc.)

 

CapEx per unit should be multiplied by all units, yes.

 

Yes, feel free to occupancy-adjust other income.

 

jeowong—I’ll aim to review your model tonight.

[Lev]

OpEx should be applied to total units, not just occupied units. Don’t dig into this too much, it’s just a high level assumption on average. Generally speaking, it’s hard to scale the majority of OpEx items up and down with unit-level occupancy (personnel, repairs, building services, taxes, insurance, etc.)

 

CapEx per unit should be multiplied by all units, yes.

 

Yes, feel free to occupancy-adjust other income.

 

jeowong—I’ll aim to review your model tonight.

[Lev]

Management fees are charged on effective gross revenue. This does not include any interest. A manager is incentivized to maximize revenue, thus they are compensated on that metric. Interest is not correlated to a manager’s performance and is otherwise an unrelated metric.

[Lev]

Opposed to investment banking and consulting, where undergraduates compete for the few summer positions at the top BB / MBB firms, real estate private equity has numerous more inroads.

IB / Consulting have one consensus path to follow — REPE does not. Don’t let this confuse you! It’s actually great optionality.
On the IB/Consulting side, the limited options removes the paralysis of choice. Their peers’ conformity to a narrow band of best options (Goldman, JPM, MS, McKinsey, Bain, etc.) allows undergraduates to rest assured they are making the right decision. It’s obvious which firms you should apply to, and they all have nice online portals where you can submit your resume. Your focus is on breaking into the top firms, because you know a good IB job will open up doors to countless exit opportunities down the road.

In contrast to IB/Consulting, there are many paths an undergraduate could follow to break into real estate private equity. It is exciting that so many paths exist. However, undergraduates choosing their future might feel paralyzed when seeking to perfectly maximize their first career decision (side note, I really recommend “The Paradox of Choice” by Barry Schwartz). I want to highlight that there is no single correct path into real estate private equity.

Any CRE career that teaches you asset underwriting is great prep for REPE
Your core focus should be to learn asset underwriting. You can get this experience at a number of firms, such as CRE brokerages, REITs, debt teams at large banks, and real estate IB groups, just to name a few. Any career that teaches you how to translate fundamental financial statements into a financial model, from scratch, is a great career to prepare you for real estate private equity. REPE funds are most interested in hiring analysts / associates with asset-level underwriting experience, so you must develop that skill. Below, I’ve listed a few of the most common career options that will teach you this skill set.

Common path: CRE Brokerages
As you mentioned, the large CRE brokerages are a fantastic option. National brokerages such as CBRE, JLL, Eastdil, Newmark, Cushman, etc. For a full list of brokerages you can research for internship positions, I would point you toward NREIOnline’s 2018 rankings (https://www.nreionline.com/brokerage/2018-top-brokers?full=1). I wouldn’t put too much weight on any particular firm’s ranking, understanding that most of these firms are full of experienced and knowledgeable professionals. The key differentiator between these brokerages is their size and employee count. Below is a list of a few top firms as ranked by the total value of global transactions:
1) CBRE Group
2) JLL (now merged with HFF: https://therealdeal.com/2019/03/19/jll-buys-brokerage-hff-for-2b/)
3) Newmark Knight Frank
4) Colliers International
5) Eastdil Secured
6) Savills
7) TCN Worldwode
8) Marcus & Millichap
9) CORE Network
10) Avison Young

Real Estate Investment Trusts are also a good option
You could also target a career in a real estate investment trust. Certain REITs can be as hard to break into REPE, but it’s worth a shot. I would recommend focusing on careers in investments or asset management, both will teach you a lot that will come in handy when networking for REPE.

Regional REPE
Although you may have set your sights on the REPE megafunds, regional REPE investors are another great option for experience. These will likely not have structured summer internship programs, in which case you will need to make yourself known to the community as a competent undergrad. A quick note on networking below, along with a series that details my networking strategy.

A lot of large CRE shops don’t have formal internships — so you need to network hard!
Unlike IB/Consulting, CRE firms do not always have extremely structured summer internship programs. This does not mean that internships do not exist. Rather, plenty of opportunities exist under the radar. This means you need to put your networking hat on and hit the pavement, contacting any and all connections at firms that could teach you asset underwriting. If you’re looking to improve your networking, I’ve already written my best practices in this series: How to Network into REPE (https://www.leveragedbreakdowns.com/2019/03/21/how-to-network-into-real-estate-private-equity/).

[Author]

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