Real Estate Underwriting Drill
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
Can we do a live real estate investment discussion? Start with a property summary for me to underwrite, since I am a second-year master of finance student targeting real estate private equity in Los Angeles on OPT.
Absolutely. Here is the deal: a 120 unit multifamily property in Long Beach, 92 percent occupied today, average monthly rent is 2,450 dollars, annual gross potential rent is 3.53 million dollars, and current NOI is 1.92 million dollars. The seller is asking a 5.75 percent cap rate. Debt terms are 65 percent loan to value, 6.5 percent interest only for 5 years. I want you to walk me through your first underwriting steps.
I would first sanity check the cap rate by dividing NOI by price, so price is about 33.4 million dollars. Then I would look at whether the 92 percent occupancy and current rent level support upside. I would also separate in-place NOI from stabilized NOI before deciding if the asking price makes sense.
Good start. If the price is 33.4 million dollars, what leverage and equity check do you get at 65 percent LTV, and how would you frame the return risk if occupancy stays flat? Also tell me what operating assumptions you would pressure test.
At 65 percent LTV, debt would be about 21.7 million dollars and equity about 11.7 million dollars. If occupancy stays flat, the downside is that NOI growth may be limited, so the going-in yield is only around 5.7 percent before financing. I would pressure test vacancy, bad debt, rent growth, operating expenses, and whether property tax or insurance can re-rate higher after acquisition.
That is directionally right. Now run a simple sensitivity: if occupancy drops from 92 percent to 88 percent and NOI falls by 6 percent, what happens to value using a 5.75 percent cap rate? Then compare that to a financing case where the loan rate rises from 6.5 percent to 7.25 percent.
If NOI falls 6 percent, NOI goes from 1.92 million to about 1.80 million dollars. At a 5.75 percent cap rate, value drops from about 33.4 million to roughly 31.3 million dollars, so about a 2.1 million dollar decline. If the loan rate rises to 7.25 percent on 21.7 million dollars, annual interest would increase by about 162,000 dollars, which would compress cash flow and reduce equity returns.
Strong. For an interview answer, I would tighten that by stating the key takeaway first: the deal is moderately sensitive to both occupancy and debt cost, but the bigger immediate risk is financing because leverage magnifies a small NOI miss. To sound more senior, mention whether you would still pursue it. My view is yes, but only if you believe in rent growth, have a clear value-add plan, and can lock financing early. In your next answer, explain your recommendation in one minute and include one risk you would ask the sponsor about.