Real Estate Finance Interview Guide
Master real estate finance interviews. Learn cap rates, NOI, development returns, waterfall structures, and debt sizing with 20+ questions and interactive practice.
Real estate private equity (REPE) combines property investment expertise with financial engineering. With over $1 trillion in global AUM, REPE funds acquire, develop, and reposition properties—generating returns through rental income, value creation, and strategic exits.
If you're interviewing for REPE roles, you need to master a unique blend of skills: cap rate and NOI analysis, development returns (yield-on-cost), waterfall structures, and debt sizing. This guide covers the essential concepts with interactive practice.
Real Estate vs Corporate PE
While both involve buying assets and creating value, real estate PE focuses on physical properties with cash-flowing leases. Key differences: quarterly cash distributions (vs exit-driven returns), lower leverage (60-70% vs 5-7x EBITDA), and cap rates as primary valuation metric (vs EBITDA multiples).
1. Core Real Estate Metrics
Cap Rate: The Fundamental Valuation Metric
Cap rate (capitalization rate) is THE key metric in real estate valuation. It's like the inverse of a P/E ratio—the annual income yield a property generates relative to its value.
Cap Rate = NOI / Property ValueRearranged: Property Value = NOI / Cap Rate. Higher cap rate = cheaper property (more income per dollar). Lower cap rate = more expensive (less income per dollar).
Test Yourself
Interview Question
A property generates $1.2M NOI and trades at a 6% cap rate. What is the property value?
Net Operating Income (NOI): Property-Level Cash Flow
NOI measures the cash flow a property generates from operations, before debt service and capital expenditures. It's the foundation for all valuation and financing decisions.
Test Yourself
Interview Question
A property has $5M gross revenue, $1M operating expenses, $500K CapEx, and $400K debt service. What is the NOI?
Real Estate Cash Flow Waterfall
| Term | Definition | Note |
|---|---|---|
| Gross Revenue | Total rent + other income | Top line |
| - Operating Expenses | Property taxes, insurance, management, R&M | Day-to-day operating costs |
| = NOI | Cash flow before financing and CapEx | Used for cap rate valuation |
| - CapEx | Capital expenditures (roof, HVAC, major improvements) | Maintenance capital |
| = Cash Flow Before Debt | Available for debt service and equity | After all property-level costs |
| - Debt Service | Mortgage payments (interest + principal) | Lender gets paid first |
| = Cash Flow to Equity | Distributable cash to investors | Actual equity returns |
2. Development Returns & Yield-on-Cost
Development projects create value by building new properties or repositioning existing ones. Yield-on-cost measures the return on your total development investment.
Test Yourself
Interview Question
You develop a property for total cost of $50M (land + construction). Stabilized NOI is $4M. What is your yield-on-cost?
Development Feasibility Framework
Rule of Thumb: Yield-on-Cost should exceed Market Cap Rate by 200-300 bps
Example:
- Market cap rate: 5.5%
- Target yield-on-cost: 7.5-8.0%
- Spread: 200-250 bps → Justifies development risk
Why need the spread?
- Compensates for 2-3 years of construction risk
- Covers cost overruns (typical 5-10%)
- Protects against cap rate expansion during development
- Rewards entrepreneurial risk vs buying stabilized
Understanding development returns is critical for value-add and opportunistic strategies—the highest-returning segments of REPE.
3. Waterfall Structures & GP Promote
REPE funds use waterfall structures to align GP (General Partner / sponsor) and LP (Limited Partner / investor) interests. Understanding how returns split between GPs and LPs is essential.
Test Yourself
Interview Question
A REPE fund has an 8% preferred return and 20% promote above the hurdle. The fund returns 15% IRR. What is the GP's approximate share of total profits?
Standard REPE Waterfall Structure
Tier 1: Return of Capital
100% to LPs until they receive their invested capital back
Tier 2: Preferred Return (Hurdle)
100% to LPs until they receive 8% annual return (typical)
Tier 3: GP Catch-Up (Optional)
100% to GP until GP has 20% of all profits distributed
Tier 4: Carried Interest (Promote)
80/20 split (LP/GP) on all remaining profits
Investment Strategy Risk-Return Profiles
| Aspect | Core / Core Plus | Value-Add / Opportunistic |
|---|---|---|
| Target IRR | 8-12% | 15-25%+ |
| Leverage | 50-60% LTV | 65-75% LTV |
| Hold Period | 7-10 years | 3-5 years |
| Cash Yield | 4-6% annual distributions | Minimal (reinvesting) |
| Risk | Low (stabilized assets) | High (development, lease-up) |
| Examples | Class A multifamily, stabilized | Development, major repositioning |
4. Debt Sizing: LTV & DSCR
Real estate debt is sized using two constraints: LTV (Loan-to-Value) and DSCR (Debt Service Coverage Ratio). The more binding constraint determines how much you can borrow.
Test Yourself
Interview Question
A property is valued at $40M. Lenders offer 65% LTV at 5.5% interest. If NOI is $3M, what is the Debt Service Coverage Ratio (DSCR)?
Typical Debt Structures by Strategy
| Term | Definition | Note |
|---|---|---|
| Core Permanent Debt | 60-65% LTV, 1.25x DSCR, 10-year term, fixed rate | Conservative, low cost |
| Value-Add Bridge Loan | 70-75% LTV, 1.35x DSCR, 3-5 year term, floating rate | Higher leverage, shorter term |
| Construction Loan | 50-60% LTC (loan-to-cost), 1.30x DSCR on stabilized, 2-3 year term | Higher rates, more risk |
| Mezzanine / Preferred Equity | 75-85% LTV combined, 10-15% cost, subordinated | Fills gap between senior and equity |
Common Debt Sizing Mistakes
- Forgetting both constraints: Must check BOTH LTV and DSCR—whichever is more restrictive binds
- Using wrong NOI: Lenders use stabilized NOI, not Year 1 (if lease-up)
- Ignoring CapEx reserves: Lenders often require reserves, reducing proceeds
- Assuming aggressive terms: 80% LTV is rare—most stabilized deals are 65-70%
- Not stress-testing: What if NOI drops 15%? Still above 1.25x DSCR?
Key Takeaways
Key Takeaway
- Master cap rates: Property Value = NOI / Cap Rate. Fundamental valuation metric in real estate.
- Understand NOI: Revenue - Operating Expenses (before CapEx and debt service). Used for all valuation.
- Development feasibility: Yield-on-cost should exceed market cap rate by 200-300 bps to justify risk.
- Waterfall structures: GPs get ~10-15% of profits with 8% pref and 20% promote, depending on returns.
- Debt sizing: Check both LTV and DSCR—whichever is more constraining determines max debt.
- Strategy matters: Core (8-12% IRR, low risk) vs Opportunistic (20%+ IRR, high risk).
Continue Your REPE Interview Prep
Build on real estate fundamentals with these related guides:
- LBO Explained Simply — Similar leveraged buyout mechanics, applied to corporate PE
- Top 20 PE Interview Questions — Overlapping PE concepts: returns, leverage, value creation
- Private Debt Interview Questions — Related debt structuring and credit analysis concepts
- Walk Me Through a DCF — Valuation methodology applicable to real estate cash flows
- Enterprise Value vs Equity Value — Understanding value above and below debt