Investment Analysis
Investment Analysis
This domain tests whether you can build and interpret a property-level cash flow, evaluate leverage, and judge return metrics. Expect pro formas, discounted cash flow, NPV/IRR, equity multiples, debt coverage, and exit assumptions.
Core rules
- Unlevered cash flow = NOI − capital expenditures − leasing costs. Levered cash flow = unlevered cash flow − debt service.
- IRR is the discount rate that makes NPV zero. It assumes interim cash flows are reinvested at the IRR, which may overstate realistic performance. NPV uses an explicit discount rate and is preferred when comparing projects with different risk or scale.
- Equity multiple = total equity distributions ÷ equity invested. It ignores timing; two deals with the same multiple can have very different IRRs.
- DSCR = NOI ÷ annual debt service; lenders often require 1.20x–1.35x, with stronger thresholds for riskier assets. Debt yield = NOI ÷ loan amount and is lender-facing, not investor return.
- Cash-on-cash = annual pre-tax cash flow ÷ equity invested; it is a one-year measure and ignores appreciation.
Worked example
A property costs $2,000,000 with $160,000 NOI. A lender provides 70% LTV ($1,400,000) at 6.0% interest-only. Annual debt service = $84,000. Equity = $600,000. Levered cash flow = $160,000 − $84,000 = $76,000. Cash-on-cash = $76,000 ÷ $600,000 = 12.67%. DSCR = $160,000 ÷ $84,000 = 1.90x. If the property sells for $2,200,000 after five years, the equity multiple must include sale proceeds net of loan balance and selling costs-not just the annual cash flow.
Traps
Mixing levered and unlevered returns; using IRR alone for ranking; forgetting capex, tenant improvements, and leasing commissions; using a terminal cap rate that is lower than the going-in cap rate without justification; and ignoring loan covenants such as DSCR or cash management triggers.