Sensitivity Analysis
Sensitivity analysis changes key assumptions to see how returns break under stress: rates, vacancy, exit cap, rent growth, taxes, costs, and timing.
Why it matters
sensitivity analysis changes what a disciplined buyer can pay, how much debt the asset can safely carry, and whether the return is coming from operations or fragile assumptions.
Formula
Scenario return = base model recalculated after changing one or more assumptions.Worked example
In underwriting, tag sensitivity analysis beside the exact source input and rerun the model when that input changes. The point is not a pretty metric; it is a better buy, hold, refinance, or walk decision.
How investors read it
Use it to kill bad deals quickly. If the back-of-envelope version does not survive conservative assumptions, do not spend five hours making it look alive.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
- · Letting an optimistic exit or refinance assumption rescue a deal that does not work today.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.