Sensitivity Analysis Calculator
One of the most important 'Due Diligence' steps you do as a real estate investor is testing your deal's "sensitivity" to your various assumptions about the future. Use this tool to maximize good deals and avoid getting stuck in bad ones.
Because none of your 'going-in' assumptions will pan-out exactly as you expect, this calculator will let you know in advance what your strengths, weaknesses and vulnerabilities are… if your investment can withstand the test of time.
Some of your assumptions are Hyper-Sensitive to even the smallest changes and have a dramatic impact on your deal's ultimate success or failure. Your assumed Property Appreciation rate is the most sensitive variable. Small changes in your Property Appreciation rate will alter your final outcome far more than even massive changes to your revenue or expense assumptions.
HousingAlerts allows you to intelligently address this critical variable and target high appreciation markets while avoiding flat or declining markets. As you'll see from this calculator, Property Appreciation matters most. Get this one wrong and the other assumptions are irrelevant.
Real Estate WEALTH comes from LEVERAGED APPRECIATION, not from operating cash flow.
A properly leveraged (residential) real estate deal will NOT produce meaningful cash flow after you include ALL expenses of ownership, including reserves for future capital replacements.
Leveraged Appreciation, NOT Cash Flow,
Creates Real Estate Millionaires.
As we saw from the last real estate cycle (and all the cycles before that), those in rapidly appreciating markets made a killing regardless of how hard they worked, how smart they were or any individual property's monthly cash flow.
Annual ROI's exceeding 300% are not unusual in those fast-appreciating markets. It takes a lifetime (literally) of 3% to 10% annual operating cash flows to equal that kind of one-year leveraged appreciation return.
WARNING: While Leverage is critical to creating wealth from real estate, in declining markets it can wipe you out. An APPRECIATING market is the key variable you should focus on;
Mastering Market Cycles is
THE Determinant for Success
Real Estate cycles often last for years; each LOCAL market is different. The compounding effect of market-wide AUTOMATIC appreciation year after year on a leveraged, high value asset makes operating cash flow irrelevant on a Total ROI basis.
Instructions:
Use this tool to test YOUR assumptions and deal particulars. (Even for so-called "cash flow" deals, you'll see how most of your return actually comes from APPRECIATION, not cash flow.)
- Enter YOUR deal specifics in the yellow highlighted cells (or use the prefilled acquisition, rent and operating expenses for a sample "cash flowing" 3BR home in a B- neighborhood).
- Enter YOUR Growth Rate assumptions in the "Sensitivity Analysis" section; test different scenarios. Results are updated immediately.
- Test your other assumptions by changing any yellow input field; know in advance what needs to happen for your deal to succeed and what variables are most sensitive to wiping you out.
- Note how, under any reasonable scenario, the largest proportion of your total return comes from APPRECIATION, not from cash flow.
Instructions:
Use this tool to test YOUR assumptions and deal particulars. (Even for so-called "cash flow" deals, you'll see how most of your return actually comes from APPRECIATION, not cash flow.)
- Enter YOUR deal specifics in the yellow highlighted cells (or use the prefilled acquisition, rent and operating expenses for a sample "cash flowing" 3BR home in a B- neighborhood).
- Enter YOUR Growth Rate assumptions in the "Sensitivity Analysis" section; test different scenarios. Results are updated immediately.
- Test your other assumptions by changing any yellow input field; know in advance what needs to happen for your deal to succeed and what variables are most sensitive to wiping you out.
- Note how, under any reasonable scenario, the largest proportion of your total return comes from APPRECIATION, not from cash flow.
| Component Sources of Total Return | |
|---|---|
| % of total return from Appreciation | {{formatRoundPercentage(percentage_from_appreciation())}} |
| % of total return from Cash Flow | {{formatRoundPercentage(percentage_from_cash_flow())}} |
| Total | {{formatPercentageWithDigit(percentage_total())}} |
| Total Return - by Source | Total $ | Total % |
|---|---|---|
| Total Return from Appreciation | {{formatMoney(model.total_cummulative_appreciation)}} | {{formatPercentageWithDigit(total_return_appreciation_percentage())}} |
| Total Return from Operating Cash Flow | {{formatMoney(model.cummulative_cash_flow)}} | {{formatPercentageWithDigit(total_return_cash_flow_percentage())}} |
| Total Return on Initial Invested Cash | {{formatMoney(total_invested_cash())}} | {{formatPercentageWithDigit(total_invested_cash_percentage())}} |
| Average Annual Return | {{formatPercentageWithDigit(average_invested_cash_percentage())}} |
Growth Rate Assumptions
Acquisition, Closing and Financing Costs
Acquisition Recap and "Initial Cash Invested"
| Purchase Price | |
| Buyer Closing Costs | {{formatMoney(buyer_closing())}} |
| Less: Mortgage Amt | {{formatMoney(mortgage_amt())}} |
| Initial Cash Invested | {{formatMoney(initial_cash_investition_non_fixed())}} |
MONTHLY Rent & Expense Estimates
| Revenue | Monthly | Annual | |
|---|---|---|---|
| Potential Gross Income (PGI) | $ | {{formatMoney(annual_pgi())}} | |
| Vacancy Allowance (months per year) | {{formatMoney(annual_vacancy_allowance())}} | ||
| Effective Gross Income | {{formatMoney(monthly_egi())}} | {{formatMoney(annual_egi())}} |
| Expenses | Monthly | Annual | |
|---|---|---|---|
| Maintenance | $ | {{formatMoney(annual_maintenance())}} | |
| Mgt. Fees (% of Rent Revenue) | % | {{formatMoney(monthly_mgt_fees())}} | {{formatMoney(annual_mgt_fees())}} |
| Property Taxes (annual rate, % of property value) | % | {{formatMoney(monthly_prop_taxes())}} | {{formatMoney(annual_prop_taxes())}} |
| Insurance (annual rate, % of property value) | % | {{formatMoney(monthly_insurance())}} | {{formatMoney(annual_insurance())}} |
| HOA | $ | {{formatMoney(annual_hao())}} | |
| Utilities | $ | {{formatMoney(annual_utilities())}} | |
| Advertising Exp | $ | {{formatMoney(annual_advertising_exp())}} | |
| Admin & Accounting | $ | {{formatMoney(annual_admin_and_accounting())}} | |
| Tenant Fit-up & Concessions | $ | {{formatMoney(annual_tenant_amt())}} | |
| Replacement Reserve (annual rate, % of property value) | % | {{formatMoney(monthly_replacement_reserve())}} | {{formatMoney(annual_replacement_reserve())}} |
| Leasing Comm (% of Lease Revenue) | % | {{formatMoney(monthly_leasing_comm())}} | {{formatMoney(annual_leasing_comm())}} |
| Bad Debt (% of Rent Revenue) | % | {{formatMoney(monthly_bad_debt())}} | {{formatMoney(annual_bad_debt())}} |
| Eviction | $ | {{formatMoney(annual_eviction())}} | |
| Other | $ | {{formatMoney(annual_other())}} | |
| Total Operating Expenses | {{formatMoney(monthly_operating_expenses())}} | {{formatMoney(annual_operating_expenses())}} | |
| Op Exp/Rent Ratio | {{formatRoundPercentage(op_ratio())}} | ||
| 1st Year Net Operating Income (NOI) | {{formatMoney(monthly_noi())}} | {{formatMoney(annual_noi())}} |
| Summary Financial Projections | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Yr {{index}} | |||||||||
| Property Value (end of year) | |||||||||
| {{formatMoney(value)}} | |||||||||
| Property Appreciation | |||||||||
| {{formatMoney(value)}} | |||||||||
| Cumulative Appreciation | |||||||||
| {{formatMoney(value)}} | |||||||||
| Annual Return on Invested Cash - from Appreciation | |||||||||
| {{formatPercentageWithDigit(value)}} | |||||||||
| Effective Gross Income | |||||||||
| {{formatMoney(value)}} | |||||||||
| Total Operating Expenses | |||||||||
| {{formatMoney(value)}} | |||||||||
| NOI (Net Operating Income) | |||||||||
| {{formatMoney(value)}} | |||||||||
| Debt Service (Interest Only) | |||||||||
| {{formatMoney(net_debt_service_arr[0])}} | |||||||||
| Annual Cash Flow (Deficit) from Operations | |||||||||
| {{formatMoney(value)}} | |||||||||
| Cumulative Cash Flow from Operations | |||||||||
| {{formatMoney(model.cummulative_cash_flow)}} | |||||||||
| Annual Return on Invested Cash - from Operations | |||||||||
| {{formatPercentageWithDigit(value, 1)}} | |||||||||
