Sensitivity analysis has been adopted by many real estate analysts due to programs like ProAPOD real estate software that make investment analysis easy.
What is sensitivity analysis? It involves changing one variable at a time over a possible range of outcomes so the real estate analyst can evaluate the effect of that change and the impact upon the investment property’s present value, rates of return, and profitability.
ProAPOD® provides three sensitivity analysis options: Price Sensitivity, Down Payment Sensitivity, and Loan-to-Value. Each essentially is a calculation and recalculation of a range of variables based upon a specific variable entered by the user in the appropriate form included in our real estate software.
Though a sensitivity analysis in ProAPOD requires just one entry, enough data about the investment property must first be entered for our real estate software to compute a “starting point” variable and rates of return based upon that variable. Price, income, operating expenses, and loan information, for instance, must all be entered beforehand.
Down Payment Sensitivity
To conduct a sensitivity analysis for “down payment”, open the LoanInfo form and scroll down to the heading, “Sensitivity Analysis.” In the appropriate field labeled “Down payment steps” enter the dollar amount you want to “step” the down payment.
What is a step? Bear in mind that you are asking our real estate software to create a “range” of values for the initial variable (in this case, down payment). The step (or value) you enter in the form merely tells our software how to create that range. That is, in what increments.
For example, suppose the investment property (based upon your analysis thus far) requires a down payment of $150,000 (the variable, or starting point for the sensitivity analysis). If you enter $1,000, for instance, our real estate software will step up and step down from that variable, creating a series of down payment amounts ranging from $127,000 to $173,000–each in increments of $1,000–with the appropriate rates of return for each amount.
This is particularly helpful when a real estate investor has funds available to make more of a down payment and would like to compare returns in order to opt for the best return.
The Down Payment Sensitivity report (actually a table) calculates a range of down payment amounts (forty-seven in all) and, in this case, a range of outcomes that include percent (or percent down), cash requirement, annual mortgage payment, debt coverage ratio (DCR), cash flow before tax, and cash on cash return.
Just for the record, ProAPOD real estate investment software implemented this great report at the suggestion of a customer who wanted it for real estate investor presentations. Yes, we do listen.