Sensitivity Analysis ('What if')
Performs 'What if' for any assumption in your analysis versus any measure, such as Rate of Return (IRR or MIRR), Net Present Value (NPV), Net Capitalization Rate, Cash on Cash, Debt Coverage Ratio, or Loan Amount. Sensitivity Analysis shows how these measures vary with a change in any of the assumptions like Price of Property, Holding Period, Cap Rate at Sale, Renewal Probability, Vacancy, TI's, etc. Sensitivity Analysis reports a one page table and graph showing the relationship between the assumption value and the chosen measure.
Sensitivity Analysis will allow you to vary
any assumption against many measures.
In essence this is the "What if" part of the software for IRR, Cash on Cash, Debt Coverage Ratio (DCR), Loan Amount, MIRR, and Net Present Value (NPV).
In any planEASe projection, there are several assumptions whose values
are inherently uncertain. For instance, you enter the inflation rate that will prevail
during the time you own the real estate. Additionally, you enter the number of years you
will hold the property before selling and the capitalization rate (or other method)
determining the sale price. These values are uncertain. As you perform the analysis, the
worth of the investment is measured by the system in terms of rates of return and net
present values. Additionally, you may choose the
Capitalization Rate, Cash on Cash Before Tax, or Debt Coverage Ratio shown in the Ratio
Analysis section of the ProForma Income Statement for the Sensitivity Measure. The concept
of Sensitivity Analysis is to investigate how these measures vary with a change in one of
the assumptions. Any measure may be chosen for the Sensitivity Analysis, and any
assumption may be chosen as well.
Sensitivity Analysis provides a one page table and graph which
describes the relationship between the assumption value and the resulting measure, as
shown in the screen above. Here the user has asked how the Rate of Return After Tax changes as the Holding Period is
varied. The analysis shows the Rate of Return which would result if the property were held
for one through ten he’ll years. For this property, if the
Holding Period is less than five years, the transaction costs are greater than the
earnings and appreciation.
Here is the graph from another Sensitivity Analysis. This time the user has asked how the Inflation Rate affects
the Rate of Return After Tax. The assumptions provide that the
rents, expenses and property value change in line with inflation, so it is intuitive that
the rate of return increases as inflation increases. This is what is meant by the
commonplace that leveraged real estate is an excellent inflation hedge. It is one thing to
simply state that an investment is a good hedge against inflation, but the Sensitivity
Analysis capability in planEASe enables you to quantitatively evaluate that hedge
and show graphically how the individual investment benefits from inflation. Here the rate
of rate of return increases approximately 3.5% to 4% for each 1% change in the inflation
rate, which is typical of highly levered real estate investments (80% Loan to Value in
this case). The graph is flat before 2% inflation because the rate of return is negative
in this area and planEASe reports a zero rate of return value in such cases.
These are but two examples of how you
might want to use Sensitivity Analysis. For instance, how about a graph showing the after
tax rate of return versus the vacancy factor or the sale price? Graphs like this provide
one page visual answers to common questions about financial projections.
Going further, suppose you’re syndicating a property. How about a graph of your fee
on sale versus the Limited Partners’ Rate of Return After Tax? Could that help you
plan your fee structure better? We think so.
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Performs 'What if' for any assumption in your analysis versus any measure, such as Rate of Return (IRR or MIRR), Net Present Value (NPV), Net Capitalization Rate, Cash on Cash, Debt Coverage Ratio, or Loan Amount. Sensitivity Analysis shows how these measures vary with a change in any of the assumptions like Price of Property, Holding Period, Cap Rate at Sale, Renewal Probability, Vacancy, TI's, etc. Sensitivity Analysis reports a one page table and graph showing the relationship between the assumption value and the chosen measure.
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