😭 99% of Candidates FAIL This REPE Interview Question

Why It Matters

Understanding levered yield calculations prevents costly investment mistakes and demonstrates essential underwriting competence to potential employers.

Key Takeaways

• Cap rate 5% yields $2M purchase price from $100k NOI.
• 60% LTV results in $800k equity and $1.2M loan.
• 10% interest on $1.2M creates $120k annual debt service.
• Cash flow after debt service is –$20k, yielding –2.5% levered return.
• Negative leverage suggests avoiding this structure; target levered yield ≥7%.

Summary

The video walks through a typical real‑estate interview problem: an asset with a 5% cap rate, $100,000 first‑year NOI, 60% loan‑to‑value (LTV) and a fixed 10% interest rate. Using the cap rate, the presenter calculates a $2 million purchase price, then derives $1.2 million debt and $800,000 equity based on the LTV.

He assumes a net‑lease structure with no operating or capital expenditures, so cash flow before debt service equals NOI. The annual interest on the $1.2 million loan is $120,000, and with no principal amortization the cash flow after debt service becomes –$20,000. Dividing this negative cash flow by the $800,000 equity yields a year‑one levered yield of –2.5%.

The presenter explicitly states the deal is “negatively levered” and would not recommend it at the given leverage and interest rate. He suggests a benchmark levered yield of at least 7% for an attractive investment, implying the need for either lower financing costs, higher NOI, or reduced leverage.

For candidates, the exercise highlights the importance of quickly translating cap rates to purchase price, correctly applying LTV, and calculating levered returns. It also underscores that interviewers often test whether candidates can spot unfavorable financing structures and propose realistic yield targets, skills directly relevant to real‑estate underwriting and investment decision‑making.

Original Description

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Real estate private equity interviews often include technical math questions like this one.

In this mock REPE interview, Quang Nguyen, VP at Bridge Investment Group, walks through a levered yield calculation step by step and explains why this $2M deal is negatively leveraged.

If you're preparing for real estate private equity interviews, investment banking recruiting, or trying to break into high finance, this is exactly the type of technical question you need to master.

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