After investment banking and private equity, generates the most career-related questions for us.

The real estate industry varies tremendously based on the firm, location, and strategy – and the differences in compensation, hours, and work styles reflect that.

Real estate private equity offers some advantages over the traditional “high finance” paths of generalist investment banking and private equity.

But it’s not for everyone, and you must read the fine print closely before buying into this career:

Real estate private equity (REPE) firms raise capital from outside investors, called Limited Partners (LPs), and then use this capital to acquire and develop , operate and improve them, and then sell them to realize a return on their investment.

The outside investors or Limited Partners might include pension funds, endowments, insurance firms, family offices, funds of funds, and high-net-worth individuals.

REPE firms usually focus on commercial real estate – offices, industrial, retail, multifamily, and specialized properties like hotels – rather than residential real estate.

If they do operate in residential real estate, the strategy is usually to buy, hold, and rent out homes to individuals (see: Blackstone).

For more, see our private equity overview.

Real estate investment trusts (REITs) raise debt and equity continuously in the public markets and then acquire, develop, operate, and sell properties.

REITs must comply with strict requirements about the percentage of real estate-related assets they own, the percentage of net income they distribute in the form of dividends, and the percentage of their revenue that comes from real estate sources.

In exchange for that, they receive favorable tax treatment, such as no corporate income taxes in many countries.

Real estate operating companies (REOCs) are similar, but they do not face the same restrictions and requirements and do not receive the same tax benefits.

Real estate private equity firms differ in the following ways:

Within real estate private equity, there are two distinct roles: and

They’re separate teams at some firms, while others combine them.

Others separate them at some levels of the hierarchy but combine them elsewhere.

The team pursues and analyzes deals, negotiates them, set up the financing, and convinces the decision-makers at the firm to invest in properties.

The team executes the business plan that is put in place once the REPE firm has acquired a property. Team members improve the property’s operations and financial performance and fix problems that come up.

The pay ceiling is higher in Acquisitions because the perception is that it’s harder to execute deals than it is to manage properties.

Asset Management is sometimes viewed as more of a “cost center” that gets blamed when deals go poorly, but which also doesn’t receive full credit when deals go well.

However, Asset Management is more stable in terms of compensation and career path because firms always need to manage their properties even if they’re not doing many deals.

You can divide real estate private equity groups by strategy, sector, geography, capital structure, and deal role:

The biggest REPE firms are highly diversified and pursue everything above.

Smaller REPE firms tend to focus on narrower markets in which they have some advantage, based on comparative market analysis.

For example, a boutique REPE firm might focus on value-added multifamily deals in medium-sized cities in the Midwest region of the U.S.

But at a huge firm like Blackstone, that might be a small part of one team’s mandate.

You can think of the main investing strategies, in terms of risk and potential returns, like this:

The top real estate private equity firms vary from year to year; you should look at the PERE rankings for an updated view.

However, Blackstone, Starwood, and Brookfield are almost always in the top few positions.

Blackstone and Brookfield are gigantic firms that do much more than real estate, while Starwood is the biggest dedicated real estate investment firm.

Of the generalist private equity firms, Carlyle tends to have the second-biggest presence in real estate after Blackstone.

At the junior levels, the work in real estate private equity is similar to the work in normal private equity: deal sourcing, analyzing potential investments, building financial models, conducting due diligence, monitoring the portfolio, fundraising, and preparing investment committee memos.

But everything relates to rather than companies, which creates differences.

For example, matter a lot because the numbers can only tell you so much about a building; you need to see it in real life to get the full picture.

Also, on-the-ground logistical issues such as working with construction workers and the on-site maintenance team matter more.

Some days, you’ll crunch numbers in Excel for 10 hours; other days, you might complete property tours, meet a construction crew, and set up conference calls to speak with LPs about a new fund your firm is raising.

People often claim that real estate financial modeling is “easier” than the financial modeling of normal companies in traditional private equity since properties are simpler than companies.

Also, you can automate some of the process using tools like ARGUS.

These claims are sort of true, but it’s more accurate to say that the sources of difficulty in the financial modeling process are different.

For example, in real estate, you’ll often get horribly formatted rent rolls, and you’ll have to spend a lot of time cleaning them up so you can translate the data into ARGUS and Excel.

But in traditional private equity, most companies have reasonable financial statements, so the complexity comes from how you choose to forecast future performance.

As a junior team member, you might expect to spend your time like this at the average firm:

It’s very similar to the normal private equity career path: Analyst, Associate, VP, Director or Senior VP, and Partner or MD…

…but there are sometimes fewer levels, which is why we didn’t list the “Senior Associate” title.

Also, there are different tracks for the Acquisitions and Asset Management side, and you get promoted up the ladder for the track you’re on.

There are fewer REPE firms than there are normal PE firms, so there are also fewer senior-level roles, and it can be even more difficult to get promoted.

Compensation in real estate private equity is highly variable, and it tends to be more performance-based than in traditional PE.

Rhodes Associates occasionally publishes compensation reports, and you can find reports on sites like Glassdoor.

If we extrapolate from those sources, the ranges for salaries + bonuses for Acquisition roles, excluding carry, might be:

I’m very confident in these numbers because data from different sources showed big discrepancies. If you have better estimates or sources, feel free to add them.

Also, note that there is a huge variation in pay among different firms. These compensation numbers correspond more to the “institutionalized” firms (pay at boutique firms and family offices will be lower).

Many firms start giving you a performance-bonus or “finder’s fee” on deals you bring in at the VP level, and some will allow deal participation and carry even for Associates.

Your carry and deal participation will increase as you move up the ladder as well.

On the Asset Management side, pay tends to be lower across the board; expect a 10-20% discount at all levels.

Also, deal participation, carry, and performance-based bonuses are more limited on that side until you become a Partner.

Unlike investment banking careers or private equity careers, where there are clear steps you must follow, real estate private equity is more of a “Choose your own adventure” game.

Professionals get into the industry from:

Of these paths, the best ones for breaking into REPE are or .

Joining straight out of undergrad brings with it the normal downsides: less flexibility, less of a network, less training, etc.

And while it’s possible to break in from the other roles above, you’ll often need other jobs before you can win those roles – so they’re less direct paths.

For example, you’re probably not going to win an Acquisitions role at a REIT right out of undergrad; you’d need some other full-time experience first.

To get into the industry at any level, you should:

Outside of the biggest firms, the recruiting process in real estate tends to be ad hoc, and firms hire “as needed.”

Therefore, you must do everything to be top of mind at firms in your area when a spot opens up.

One final note: the “top schools” in real estate are somewhat different, and you don’t necessarily need an Ivy League or Oxbridge degree to get in.

For example, in the U.S., schools like USC, UC Berkeley, and the University of Wisconsin-Madison are top choices due to their alumni networks in the industry.

Other strong choices are Northwestern, UPenn, and NYU.

These are all good schools, but they’re not the best overall universities in the country.

In the U.S., the REPE interview process starts with you completing first-round interviews with a few of the more junior people on the team, such as Private Equity Analysts and Associates.

They’ll ask a mix of fit, technical, and industry/market questions, and you’ll advance up to more senior team members, such as the Director of Acquisitions or Asset Management, after this first round.

Once you’ve met everyone on the team, you’ll most likely receive a .

It’s usually based on Excel, a written property description, and a “Should we invest?” question at the end.

However, they could also test something like ARGUS, or the case study could be more qualitative.

If it’s an Excel-based case study, the possibilities are similar to the ones in private equity interviews:

If you want case study practice, our Real Estate Financial Modeling course gives you examples of the tests above with the full solutions:

You could also get a sense of the models by looking at the example pro-forma on this site.

If you do well in interviews, everyone likes you, and you pass the case study with a reasonable score, you should expect a job offer soon.

In Europe and the broader EMEA region, is often reversed, and they might start with the case study or modeling test.

The logic is that if financial modeling skills are required for the role, there’s no point in conducting multiple interviews until you prove that you have the skills.

Interview questions in this industry span a wide range.

On one extreme, interviewers could stick to investment banking-style questions about fit, deal/client experience, and even finance, accounting, and valuation/DCF technical questions.

On the other extreme, they could go “all in” on real estate.

The most likely scenario is , especially if you’re joining from investment banking, traditional private equity, or something other than a pure real estate role.

For the standard behavioral and technical questions, please see our guide to investment banking interview questions and answers.

The rest of this article will focus on

It’s a very tangible asset class that’s rooted in real cash flows, not pie-in-the-sky future assumptions, and it combines financial analysis with real-life, on-the-ground knowledge. It’s also one of the oldest asset classes and will likely be around in some form forever.

For investors, real estate combines elements of Equities and Fixed Income and allows for strategies that are somewhere in between them, or even above/below them in terms of risk and potential returns.

There are also many investment options, from individual properties to loans to REITs to real estate funds to crowdfunding, and they all have their benefits and drawbacks.

The main categories are office, industrial, retail, and multifamily properties.

Office, industrial, and retail properties have businesses as tenants and offer long-term leases of 5-10 years. The lease terms are highly variable and often include different rental rates, rental escalations, free months of rent, expense reimbursements, and tenant improvements.

Industrial properties can be built more quickly and cheaply and tend to have fewer tenants, while office and retail properties take more time and money and tend to have more tenants.

Multifamily properties have individuals as tenants and offer short-term leases (usually 1 year), with very similar terms for all tenants.

“Other” property types include hotels, storage, data centers, healthcare facilities, condominiums, and more; they also differ based on the tenants and leases or ownership.

The main strategies are “Core” (buy an existing, stabilized property, change very little, and sell it again), “Core-Plus” (similar but make minor upgrades), “Value-Added” (acquire an existing property, renovate or greatly improve it, and then sell it again), and “Opportunistic” (develop or re-develop a property and then sell it).

Core real estate offers the lowest risk and potential returns, Core-Plus is slightly higher, Value-Added is higher, and Opportunistic offers the highest risk and potential returns.

Net Operating Income, or NOI, represents the property’s cash flow from operations on a capital structure-neutral basis before most of the capital costs (disagreements over the Reserves).

NOI lets you compare and value properties and analyze acquisitions and developments; it’s similar to EBITDA for normal companies, but not the same due to the treatment of Reserves.

The Cap Rate equals the property’s stabilized forward NOI divided by its “price” (asking price or actual sale price); lower Cap Rates mean higher valuations, and higher Cap Rates mean lower valuations.

See our comprehensive guide to the real estate pro-forma.

With NNN leases, the tenant pays Rent, plus its proportional share of Property Taxes + Insurance + Maintenance/Utilities; with NN leases, it’s just Rent + Property Taxes + Insurance, and with N leases, it’s just Rent + Property Taxes.

Full-Service Leases require Rent but no expense reimbursements. They tend to have the highest rent since the tenant does not reimburse the owner directly for the other expenses.

The Base Rental Income is 5,000 * $50 = $250,000. In Year 1, this tenant receives 3 months of free rent, which is 25% of the year, so the Concessions & Free Rent line is $250,000 * 25% = $62,500.

The Expense Reimbursements for this tenant are 20% * $500,000 = $100,000, so its EGI is ($250,000 – $62,500 + $100,000) = $287,500.

The pro-forma numbers tend to be “lumpier” for office, retail, and industrial properties because they have fewer tenants with more customized leases, and there are often long periods of downtime in between tenants and significant concessions when new tenants move in.

Capital costs such as Leasing Commissions and Tenant Improvements are also far more significant, which reduces cash flow for these properties.

These items are much lower for multifamily properties, but unit turnover is much higher, and they may have more staffing and sales & marketing needs as a result.

Also, rent, occupancy rates, and expenses for multifamily properties tend to change much more quickly if there’s a downturn because the leases are short-term.

Revenue split into Room Revenue, Food & Beverage, and “Other,” which includes fees from Parking, Telecom Services, and Events.

Then, there are Departmental Expenses that match the revenue categories, Undistributed Expenses for items that don’t match revenue categories, such as Sales & Marketing and Repairs & Maintenance, and Fixed Expenses, such as Insurance and Property Taxes.

NOI = Revenue – Departmental Expenses – Undistributed Expenses – Fixed Expenses, and then you subtract Capital Costs to get Adjusted NOI.

First, you make assumptions for the land required, the construction costs, and the Debt and Equity to use. Then, you project the costs, initially draw on Equity to pay for them, switch to the Construction Loan past a certain point, and draw on the loan as needed, capitalizing the interest and loan fees.

When construction finishes, you assume a refinancing, project the lease-up period for individual tenants, and then build a Pro-Forma with debt service based on the Permanent Loan.

Then, you assume the property is sold in the future based on its NOI and a range of Cap Rates, and you calculate the IRR to Equity Investors.

You assume they are capitalized because the property will not have cash flow to pay for them when construction is taking place.

You could pay extra for an upfront reserve, but doing so will reduce the IRR and multiple because the Equity Investors will have to contribute more in the beginning.

Construction Loans are riskier and, therefore, have higher interest rates, so they attract different lenders than permanent loans for stabilized properties. And lenders want underlying assets that match their risk tolerance.

Equity Investors also like commercial real estate loan refinancings because they boost their returns if the property’s value has increased.

The property can take on additional Debt once it stabilizes, so (Total New Debt – Old Repaid Debt) gets distributed to the Equity Investors as a cash inflow.

You first assume a purchase price based on a Cap Rate and the property’s NOI, and you assume certain percentages of Debt and Equity to fund the deal.

You then make assumptions for the property’s revenue and expenses, sometimes projecting individual tenant leases (for office/retail/industrial properties) and sometimes using higher-level assumptions such as the average rent or ADR (multifamily and hotels).

You forecast the Pro-Forma over several years, project the Debt Service, and you assume an exit in the future based on a Cap Rate and the property’s stabilized forward NOI.

Finally, you calculate the returns based on the initial Equity contribution, the Cash Flows to Equity, and the Net Proceeds after Debt repayment upon exit.

The NOI each year is $10 million * 5% = $500K, and you use $7 million of Debt and $3 million of Equity.

Assuming no capital costs, Cash Flow to Equity in Years 1 to 3 = $500K – $7 million * 5% = $150K.

In Years 4 and 5, Cash Flow to Equity is approximately $150K – $7 million * 2% = $10K.

In Year 5, you sell the property for $500K / 4% = $12.5 million and must repay ~$6.7 million of remaining Debt, resulting in just under $6 million in Equity Proceeds ($5.78 million exactly).

You invested $3 million and earned back around $6.2 million if you count the Cash Flow to Equity in Years 1 – 5 and the ~$5.8 million in Equity Proceeds at the end.

This is just over a 2x multiple over 5 years, so we’d approximate the IRR as “slightly above 15%” or “between 15% and 20%.”

If you run the numbers in Excel, the exact IRR is 17%.

Cap Rates, DCF Analysis, and the Replacement Cost methodology.

Cap Rates are simple to apply, but they don’t work as well in smaller regions with more limited data; people also disagree about how to calculate NOI.

The DCF model is the most theoretically correct methodology, but it’s based on far-in-the-future assumptions and is less useful for stabilized properties that don’t change much.

Replacement Cost estimates the cost of reconstructing the entire building from scratch today and compares it to the property’s asking price.

It can be more grounded in reality than the DCF or Cap Rates, but different developers will give wildly different cost estimates, so it’s often used as more of a “sanity check.”

The more valuable building, i.e., the one selling for a lower Cap Rate, might have higher-quality tenants, more favorable lease terms, a higher occupancy rate, or lower ongoing capital costs.

The Cost of Equity is based on the equity returns the investors are targeting in this “deal class” (e.g., Core vs. Core-Plus vs. Value-Added vs. Opportunistic), and the Cost of Debt is linked to the coupon rate on Debt. Discount Rate = Cost of Equity * % Equity + Cost of Debt * % Debt… and if there’s Preferred Stock or anything else, you also factor those in.

See our video tutorial on the real estate waterfall model.

The waterfall schedule allows the Equity Proceeds from a deal to be split up in a non-proportional way if the deal performs well enough.

For example, if the Developers contribute 20% of the Equity, normally they would receive 20% of the Equity Proceeds.

But a waterfall schedule lets them receive 20% up to a certain IRR and then 30% or 40% of the Equity Proceeds above that IRR if the deal performs well enough.

This structure incentivizes the Developers or Operators to perform while taking away little from the Investors or LPs.

Preferred Returns give one group, such as the Investors or Limited Partners, 100% of the positive cash flows from the property until they reach a specific Equity IRR or Multiple, such as 10% or 1.0x.

Then, the other group(s) may receive Catch-Up Returns that “catch them up” to that same Equity IRR or Multiple, which means that the other group(s) will receive 100% of the next available positive cash flows up to that level.

Once these thresholds are reached, the Equity Proceeds will be split based on percentages.

Senior Loans are secured Debt where the property acts as collateral, they tend to have the lowest interest rates (either fixed or floating), and they often have amortization periods that far exceed their maturities (e.g., 30-year amortization vs. 10-year maturity).

Senior Loans fund property acquisitions up to a certain Loan to Value (LTV) that lenders will accept, such as 60% or 70%. If the sponsor wants to go beyond that, it will have to use Mezzanine, which is unsecured Debt that is junior to Senior Loans.

Mezzanine has higher, fixed interest rates, either paid in cash or accrued to the loan principal, amortization is rare, and the maturity is almost always shorter than the maturity of Senior Loans.

How can you determine the appropriate Loan-to-Value (LTV) or Loan-to-Cost (LTC) ratio for a deal?

You look at the LTV or LTC for similar, recent deals in the market and use something in that range.

You could also size the Debt based on the credit stats the lender is seeking, such as a minimum Debt Service Coverage Ratio (DSCR) of 1.2x and a minimum Interest Coverage Ratio of 2.0x.

Suppose that the Debt Service Coverage Ratio (DSCR) is 1.1x, the Debt Yield is 8%, and the Going-In Cap Rate is 7%. What does this tell you about the deal?

The deal uses too much leverage because the DSCR is quite low – lenders usually want to see at least 1.2x to 1.4x so there’s enough “cushion” if something goes wrong.

Also, the Debt Yield (NOI / Initial Debt Balance) and Cap Rate (NOI / Initial Purchase Price) are very close, which means additional risk.

If the Cap Rate ever rises above the Debt Yield, you’re in trouble because then the Debt is worth more than the property itself (i.e., you’re “underwater”).

The short answer is “Not necessarily, but it helps to know the basics – and it doesn’t take that much time/effort to learn.”

ARGUS is useful for creating the pro-forma for office, retail, and industrial properties that have many tenants with different lease terms; it’s much easier than using Excel.

You don’t “need it” if you make some simplifying assumptions about leases, but it can be quite important on the job if your firm focuses on office/retail/industrial properties.

ARGUS is an expensive program, so I don’t recommend purchasing it outright.

But if you can complete some training via an industry association or another group, it’s well worth it.

Let’s say you make it through real estate private equity interviews and win an offer.

You stay in the role for a few years, learn a lot and get paid well, but then you decide it’s not for you – even though most of your colleagues plan to stay in it and move up the ladder.

What happens next?

Those who leave the industry may start their own firms or become “real estate entrepreneurs” with their own portfolios.

It’s more feasible to start a real estate investing business than it is to start a private equity firm because less capital is required.

It’s also possible to move into a generalist private equity role, but you need to do so relatively early – i.e., after 1-2 years on the job, not 5+ years.

You could also move into other real estate opportunities, such as real estate lending, real estate investment banking, or real estate brokerage.

Finally, many tech startups are looking to change or disrupt the industry, and there’s high demand for RE professionals who are also interested in tech.

We like to sum up everything at the end of our “career path” articles, so here’s the summary for real estate private equity:

Real estate private equity is a specialized industry, but it can be a great side door or back door into finance.

You’ll earn less than in some other front-office roles, but you’ll have a better life and plenty of exit opportunities if you want to stay in real estate.

Just make sure you read the fine print closely before buying into this career – even if you’re planning on a “quick flip.”

Want More?

If you liked this article, you might be interested in:

• What to Expect in Real Estate Private Equity in London When You Join Right Out of Undergrad
• How to Break into Real Estate Debt Funds, from Senior Lending to Mezzanine
• Consumer Retail Private Equity: Barbarians at the Gate, or Tech Bros on a Shopping Spree
• Commercial Real Estate Brokerage: Make Millions Without Suffering Through Investment Banking First?