Leveraged Breakdowns

Three Mistakes to Avoid in Real Estate Private Equity Interviews

This post examines three common mistakes that candidates make when interviewing for real estate private equity jobs. I have interviewed countless candidates for various positions at my fund. If you make any of these mistakes, you will be immediately cut from my process. Protect your candidacy by avoiding these easily avoidable pitfalls.

Mistake #1: Freezing when Asked Simple Mental Arithmetic Questions

You’re going to work with numbers all day. Mental arithmetic is a basic skill you should master before your interview. If you can’t divide whole numbers by one another, consider learning. There are plenty of basic apps to practice mental arithmetic.

If I ask you to multiply 5.5% by $50, you better answer within three seconds without freezing up. For context, I would never phrase the question as “multiply 5.5% by 50 right now.” Rather, I would imply the calculation through a finance question. Here’s a specific example of such an arithmetic-focused interview question.

What’s the implied Y1 LCF on a $50M equity investment bearing a 5.5% cash-on-cash yield?

If you don’t tell me $2.75M in a snap, I’ll know you haven’t been practicing your mental arithmetic.

Mistake #2: Coming to the interview without a contrarian investment thesis

Real estate private equity investing is all about outsmarting the market. I am speaking literally here. The MSCI US REIT Index’s annualized return over the last five years has been 7.79% (source). In contrast, most core plus real estate private equity funds target an 11.0% to 13.0% return with comparable leverage and asset quality.

So when you come to my interview, I’m going to ask for your contrarian view on real estate. My question will sound like this:

“What is your contrarian view on real estate right now? In other words, what common belief in the marketplace do you disagree with? How do you propose capitalizing on your contrarian thesis?”

A great response to this question incorporates the following elements

First, specify the common belief in literal terms. Perhaps you think retail doesn’t deserve the beating, or perhaps you think industrial properties are overvalued. Whatever it is, clearly state the contrarian thesis.

Literally, this would sound like:

“First, I believe that last-mile industrial warehouses currently sport inflated valuations. I think the market has cast a blind eye to the inevitability of technological disruption in logistics. In the same way Amazon made B-class retail obsolete, decentralized distribution networks and autonomous delivery systems could disrupt the primacy of centrally-located warehouses and eliminate the immediate need to be so close to the action.”

Second, do not call your interviewers stupid. You probably didn’t expect to do this, so maybe you’re confused why I put this on my list. Well, you should never give the above pitch to a fund with a significant position in last-mile industrial real estate. If you do, don’t expect a call-back.

Third, craft your contrarian view into a literal investment thesis. In the first bit above, you clearly stated your thesis. You think that last-mile industrial is overvalued. But how do you make money off that? A good follow-up would sound like this:

“Last-mile industrial real estate does not merit such a high premium. Instead, I would focus capital on acquiring and developing future-proof facilities. I would develop charging stations for electric vehicles, retain roof space for drone deliveries, and develop modular parking space that can be replaced with more warehouse space once autonomous trucks require less downtime in the lot. More importantly, I would only do this at properties along more permanent transit routes such as highways, rivers, and ports, but not so close to population-dense areas as to avoid the last-mile premium.”

In summary, I ask all candidates for their contrarian investment pitch. In their response, I expect to first hear what the conventional view is, what the contrarian position is, and how to make money off the contrarian view. Any response that doesn’t clear this bar is a definite failure.

Useless but Fun Anecdote of an Interview Candidate’s Terrible Bitcoin Pitch

Here’s a fun anecdote to skip if you’re in a rush. I literally had a top-ranked candidate pitch me Bitcoin. Not real estate blockchain (which would also be a terrible idea) — just buying some bitcoin. They said they had no idea what drove the value. We’re a fundamental value investment shop — our entire job is to understand what drives value. If you really have a killer Bitcoin thesis, maybe reconsider your decision to pursue REPE rather than day-trade crypto. Needless to say, I stopped replying to their emails.

Mistake #3: Not Learning the Basics of the Fund

Learn the basic facts of the fund you’re interviewing with. Leveraged Breakdowns occasionally profiles the major funds, but Google is always your best reference. Before you step into your interview, you must know the following facts about the real estate private equity fund:

  1. When was the fund founded?
  2. What is the size of its most recent fundraise? When did it close? What is its target return?
  3. Who is the CEO of the fund?
  4. What are the real estate private equity fund’s five most successful real estate investments? To answer this, understand how REPE funds measure success. Several track-record metrics include Levered IRR, Levered MoC, Cash on Cash, etc. Don’t know these terms? Learn them with us.
  5. What are the REPE fund’s five most recent real estate equity investments?
  6. What are the fund’s top three contrarian views? You can learn contrarian and conventional views by reading articles on their investments. Journalists usually explicitly state the views, it’s really easy to figure it out. Good news sources for REPE investments are listed here (scroll to the bit on news sources).

Mistake #4: Referencing the Fund’s Investments without Knowing the Facts

Don’t mention any of the fund’s investments if you don’t know the facts. Most candidates will bring up one or two of our real estate fund’s recent investments to demonstrate familiarity. However, nearly all of them retreat when I press them for more information.

A typical bad conversation that is an immediate red flag to cut a candidate sounds like this:

Bad Candidate: “Our real estate professor lectured on your office investment in Los Angeles. What a tricky ground lease! It must have been great to negotiate that.”

Me (interviewer): “It was a beast. What do you remember about that ground lease?”

This is the point where I only expect the bare minimum. How long was the ground lease term? Did we successfully renegotiate it? What was the outcome? What are the risks?

Bad Candidate: “Oh well, I can’t really dive into the specifics. I just think it speaks well to your firm’s ability to navigate complex investments that other shops can’t handle.”

By receding into the generic compliment, the candidate has shown their hand. The candidate performed nothing more than surface-level diligence. We’re hiring you to dive deep into extremely complex situations. If you don’t know the facts for an investment that you bring up, then you’re not cut out for the job.

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