What exactly is a real estate investment case study? It’s basically a story problem like you had in algebra class. But instead of a train leaving Chicago going west at 45 mph, we have a building that is leased to Walgreens for 45 years.
A case study is a set of facts that are used to illustrate a point or test comprehension. In real estate, a case study is often used to test an analyst’s ability to properly calculate private equity real estate returns. Some case studies are loaded with information that may take hours to model. Others are simple and can be solved on the back of a cocktail napkin (or in your head). As a neophyte, you have two main reasons to read and work through case studies.
Develop Your Underwriting Chops
Most REPE interviews are going to cut to the chase and give you a constrained scenario to model. There is no better way for a fund to judge a candidate’s skills than to give a problem to which the interviewer already knows the answer. The question will be to see if you can get the right answer, and how long it takes you to get there.
Once you’ve landed your first analyst job, the real pressure begins. In the interview everyone else knew the answer, and you were judged on whether or not you could figure it out. Once you’re hired, your boss will expect YOU to know the answer, because no one else knows what the answer is. Does this project pencil out? Does it meet the firm’s investment parameters? Your job is to figure out the returns, and to be right. Everyone is counting on you to be right.
Develop Your Spidey-Sense
There will come a time in your career as an analyst that you will be handed an offering memorandum for a property (a sales flyer from the listing agent with rent rolls, operating history, market information, tenant information, and lots of good photos). You will spend hours poring over the details and building your model. You will walk into your boss’ office and he says “So how did it pencil out? 17.5% levered yield?” You will pause for a moment, speechless, because in 5 seconds your boss will have come within 25 basis points of the rate of return that took you a full day to nail down. How did he do that?
Resist the urge to be angry. Your boss has experience. She has seen enough deals to understand the major influencers of value, and can quickly do the general math in her head. What you need is practice. Practicing real estate investment case studies will develop that sixth-sense that tells you when the result you’re looking at doesn’t make sense. Practice will help you guesstimate the returns on a deal based on a limited amount of information before you ever crack open a spreadsheet. Practice will also help you ask better questions and make better assumptions.
Calculating private equity real estate returns may seem like a very precise science. In many ways it is. But the art of knowing which questions to ask, whether the assumptions you’re using really make sense, and knowing how far you can push certain numbers is what distinguishes great analysts from good ones. There are no shortcuts. It takes practice.
It’s extra work to practice building models with case study data. But then you’re not here because you’re afraid of extra work, are you? You’re here to jump-start your career, whatever it takes. We’re glad you’re here!