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Describe how sensitivity analysis works and how it is used in evaluating a real estate investment opportunity?


Describe how sensitivity analysis works and how it is used in evaluating a real estate investment opportunity?

As the name implies, sensitivity analysis examines how an end result (for investments, total return/end value) is dependent upon an input variable. For real estate, you would probably want to look at the sensitivity to interest rates. Although I don't do this for real estate (I stick with stocks), what I'll do is take the gross cash flows and then apply various discount rates to see how that changes the end valuation. The other thing I look at is growth rate, but I'm not sure how applicable that is to your situation.

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