How Real Estate Private Equity Firms REALLY Value Properties

How Real Estate Private Equity Firms REALLY Value Properties // Major private equity firms are some of the most sophisticated real estate investors in the industry, with access to almost unlimited, in-depth market data, top-tier talent working on deals, and complex proprietary financial models that they use to make cash flow projections and analyze properties.
But after working at these types of firms myself for almost ten years, I've seen firsthand that there's a pretty standard process that's used across the board to value commercail real estate, which isn't as complex as you might think.
So in this video, I want to share with you exactly how real estate private equity firms come up with offer prices on commercial properties in the market, the core drivers of pricing that these investors are focused on most, and how you can use these same strategies to improve your real estate investment decisions when building your own portfolio.
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🕒 Timestamps 🕒
0:00 Introduction
0:58 Defining REPE
2:03 Capital Risk Buckets
2:34 Risk Level 1
3:44 Risk Level 2
4:59 Risk Level 3
6:34 Risk Level 4
8:16 Learn How To Analyze CRE Deals
#commercialrealestate #privateequity
*Nothing in this video should be construed as tax, legal, accounting, valuation, or financial advice or recommendation. All information in this video is intended solely for educational purposes, and you are advised to consult with your own personal professional advisors regarding your personal investment decisions.
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[@BreakIntoCRE]

Which return metrics do you focus on most when valuing properties?

[@williamc123]

Equity Multiple and IRR

[@DanielleDeck-mb4gz]

Less leverage = Bad for returns

[@SimanAlexsei]

How do you mean? Details please.

[@KelvinEmma-iu1fi]

@@SimanAlexsei I'm from UK and also Melisa Aurora Benavidez is my FA, amazing woman really

[@FudgeMichael-zy5xf]

@@SimanAlexsei Quick search online for Melisa Aurora Benavidez. Thank me later

[@josepetitfrere]

My metric for valuing deals are COC, XIRR, and EM

[@BreakIntoCRE]

All very important metrics - thanks for adding this!

[@bowenb6695]

As someone with a marketing background currently leveraging your courses to secure an entry-level analyst or associate position, I believe it would be beneficial to have a "Certification Course" or a similar credential that we could include on our resumes to officially recognize the education received from your platform.

[@BreakIntoCRE]

Great feedback, Bowen! We released the Break Into CRE Analyst Certification Exam within the Break Into CRE Academy platform back in 2021 with this in mind, which is intended to help our members showcase the skills they've built through our courses (the certificate shown at 9:01 in this video). If you're interested in earning the certification, you can check out the Academy platform here: breakintocre.com/the-academy/

[@bowenb6695]

Thank you! Going to keep taking your courses until I get efficient enough at modeling from scratch myself. Really feel like I need an acronym or something to remember everything in the models. @@BreakIntoCRE

[@laurencedo1817]

I believe it depends. For merchant builders -> untrended YOC & Equity Multiples. For Cashflows investors -> COC, IRR & EM. If I’m wrong, please don’t come after me Justin… I’m still learning 😅

[@Hitthelight]

Thank you very much for this video.
I have a question please: what is the assumed risk free rate corresponding to the targetted IRR given in the video for Core, Core+, Value add and opportunistic? Your answer will help me compute a premium over the risk free rate for these 4 buckets.
Many thanks!

[@anthonymedina3533]

In the third category, value-add, what considerations do firms consider when evaluating new leases with either current or new tenants? How do they source these new tenants and vet them?

[@pkpledn6]

Is there a video that explains in the detail the use of leverage to generate these higher IRRs?

[@thejcsparks]

Your the expert, however, I'm not sure if you overlooked at 8:03. You said investors we're looking lower IRR targets when rates are low and higher IRR targets when rates are high.
Wouldn't it be the opposite? lower IRR targets when rates are high, higher IRR when rates are low?

[@BrittanyKing12]

How long do private equity firms want to hold the opportunisitic bucket properties for generally?

[@adamanderson225]

Quick question....when using the cash flows to do an irr over the hold period. Are the cashflows based on the nominal dollars put into a deal and nominal dollars out( ie the total capitalization). Or do you calculate just on the equity portion of money put in and or dividends taken out over the hold period plus the actual equity return on a sale? I guess I'm trying to understand if irr is based on actual return to the equity holder net of debt considerations. When I see companies state irr are they talking on all cash flows or those specifically to equity holders. If the latter then for individuals this is obviously pretax as well. Right?

[@nevermind0143]

Often you’ll do both, with total capitalization being called “deal level” metrics and or “LP/GP” metrics. Right now we’re working on a deal where we don’t know the partnership structure quite yet but are trying to start marketing the deal for capital so we are just focusing on deal level returns.
Returns are basically always pre-tax, though real estate cash flows often won’t take too much of a hit because of depreciation benefits.

[@adamanderson225]

Thanks for info! Much appreciated.

[@nevermind0143]

@@adamanderson225np. If you haven’t signed up for Justin’s class, walking through the process of building a couple of models and tweaking the variables around is one of the most direct ways to build an intuitive understanding of how all this stuff works. He explains things very clearly, highly recommended.

[@BreakIntoCRE]

The IRR is based on the timing and amounts of equity contributions and distributions on a deal throughout the entire hold period, so this is based on the actual returns to equity investors after factoring in debt (assuming we're referring to a levered IRR). As you mentioned, CRE cash flows are almost always modeled on a pre-tax basis, and the IRR is calculated on a pre-tax basis as a result.
Good question!

[@alexshafir1]

With all due respect , the IRR is a measure of the Money-Weighted Return , but not the Time-Weighted Return