using) resulting from that change.For example, suppose the asking price for a property is $500,000 and you want to know what thecap rate becomes if the price were reduced (or raised) in increments of maybe $1,000, $5,000, or $10,000. Simply input an amount to "step" the sale price (say, $5,000), and the sensitivity analysiswill display a range of prices in increments to that step, i.e., 505,000, 510,000, 515,000, etc. alongwith the resulting cap rate for each one of those sale prices.
Down Payment Sensitivity
Suppose you want to determine the cash on cash return based upon a range of down paymentamounts. Let's say, for instance, an income property will produce a 5.5% cash-on-cash return witha down payment of $150,000, but you want to know how much of a down payment is required toachieve a 6.5% cash-on-cash return.As before, to create the sensitivity analysis table, you simply input an amount to "step" the down payment. Depending on what real estate investment software program you're using, you should beable to determine the results for the cash on cash return along with your cash requirement,mortgage payment, debt coverage ratio, and annual cash flow for each down payment amount.
The loan to value sensitivity is a good way for you to determine the monthly loan payment basedupon a range of loan amounts and interest rates. It's the same procedure as before but in this case,to create the sensitivity analysis, you want to step the loan amount and the interest rate.Let's say you want to evaluate the monthly loan payment for a range of loan amounts at variousinterest rates such as $300,000, 310,000, and 320,000 at 6.0%, 6.125%, and 6.25%. In this case,you input a dollar amount to step the loan and then a percentage to step the interest rate, and Viola!Your sensitivity analysis table is created with numerous monthly loan payments based on thosevariations.
Why It's Popular
Sensitivity analysis has become popular because easy-to-use real estate investment software programs can calculate and recalculate a range of variables quickly.Moreover, real estate investment software solutions create tables and reports. What would havetaken hours before, now with the computer and template-based spreadsheet software for thecomputer, takes just minutes. So you're without an excuse.If you work with investment property (or intend to), be sure to take advantage of a sensitivityanalysis. It has proven to be an excellent way to examine variables quickly, and not surprisingly
©2008 James R Kobzeff. All rights reserved.