Open Case - Questions to Ask & Structuring

Question

Hello,

I am dealing with following - pretty open - case question: Would you recommend me investing in real estate?

1. What additional questions should be asked?

What comes to my mind is:

- What would be your objective of the investment (e.g. profit, investment for old age ..)

- Do you have a certain real estate market in mind (region or even city?) If we have market, information on attractiveness, e.g. growth rate, expected growth rate etc.

- What are your financial capabilities?

2. And how could the structure of the case look like? (Of course this depends on the objective, but let's assume it's either having a certain profit margin in XX years or just seeing it as an investment for the old age)

Any thoughts on how to approach this case are hihgly appreciated :)

Answer 1

Hi Anonymous,

regarding clarifying questions at the beginning: these questions have the following objectives:

Completely understanding the context/situation (including, unclear terminology, but also, for example, the business model of the client if unclear!)
Understanding the question(s) of the client
Understanding (and quantifying if applicable) the underlying objective(s) of the client

These questions are aiming at understanding the initial setting, hence forming a precondition to outline your structure towards answering the core question (the issue tree)!

Please note: the clarifying questions are NOT meant to gather information that will be later used in the analysis. This will come across extremely random and arbitrary! Such questions should be a direct consequence of your approach/structure, but not come before.

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Regarding the structuring: this is a typical strategic decision - you can easily translate it to a number of different contexts, but the principles upon which you base your approach should always remain the same:

1. Core Question: "Should the client invest into Real Estate?"

2. Identify criterion to make this decision: If income ("value") is the objective (to be verified in clarifying questions), then the additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: Purchasing Price of target real estate / yearly operating cost of these building(s) if purchased / yearly rental income / projected development of selling price in the future / investment horizon of client

4. Deep dive into the value bucket by means of a profitability tree: what are the levers of value here? Compare Scenario A (investing into real estate) to Scenario B (not buying real estate and investing into best alternative) in terms of profit

5. Calculate annual value (delta between Scenario A and B). If investing into real estate indeed gives you higher expected income (both rent and potential increase in future selling price), then divide the purchasing price of the real estate plant by this additional yearly income. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

Cheers, Sidi

Answer 2

Hi,

In terms of clarifying questions you have to understand:

Required returns
Time horizon
Current investment capabilities ($)
Any other preferences or limitations (Type of real estate assets, geographical, particular investments in mind, etc)

Would not come not recommend any structure at this point, since depending on the answers it can be completely different cases:

Understanding the real estate price trend in a particular country
Feasibility of the particular investment
Understanding if a certain business case (e.g. hotel franchise real estate) makes sense
Etc

Pls don't fall into the temptation of structuring things before you collect all the information

Best!

Answer 3

Hello,

If he gives you information about the market, you can easily estimate the return of the investment and calculate the NPV. The NPV is always a basic and good approach to evaluate an investment.
Remember, before giving an answer, also to evaluate the risks of the business and potential alternatives to the real estate.

Best,
Luca

Answer 4

Hello!

What is being tested with this question is your ability to structure something vague and with little information.

My advise would be to:

Understand fully the target of the client: whether is and ROI of X years, increase presence for whatever reason, consolidate a market, etc. Once you have this clear, you can do simple canculations for the go/no go decision -that is what it´s beeing asked here-.
Understand your clients and its particularities: it would be a mistake to draw conclusions only knowing the target and the market. What would be a terrific invesvement for some people would be terrible for others, so you need to invest time in learning what´s the EXACT situation -financially, in terms of targets, presence, alternatives, risks, etc.

Hope it helps!

Cheers,

Clara

Answer 5

Hi,
I confirm objectives, budget and info about the market are the clarifying questions you have to focus on. About the structure, I would conduct a benchmark with other forms of investments considering the key KPIs of expected return (ROI, ...), timing (breakeven, ...), exit options, risks, capabilities, effort. You should weigh them starting from the client objectives. If real estate is the best investment option, you can think about an implementation plan (set-up a team, benchmark all the options in the market, funding, ...).

Hope it helps,
Antonello

Answer 6

Hi,

There is always more that you can understand. For example, if you understand the goal as improving profits, there's so much more you can ask - do they have a % change target in mind, how long do we have to turn this around, do they prefer this to be done through raising revenue or cutting costs, etc.

I always write BOTMG at the bottom of my framework page to help myself think of things I'm missing in case I'm stuck.

This helps "trigger" you to consider questions around B = Business Model, O = Objective, T = Timing, M = Market, G = Geography.

However, you should never just say "so, what is their business model?" Obviously, ask questions that help you frame your hypothesis, understand the situation, and ultimately drive your case better.