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Sensitivity Analysis - Professor's Slide Notes

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Sensitivity Analysis - Professor's Slide Notes

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Questions and Answers

What is the purpose of sensitivity analysis in real estate investment?

To determine the best time to exit an investment

To predict future market trends

To calculate the exact ROI of an investment

To evaluate the impact of identified risks on investment returns (correct)

What is the key outcome of using sensitivity tables in real estate investment?

Calculating the exact property appreciation rate

Determining the optimal investment amount

Predicting market volatility

Evaluating the impact of risks on returns (correct)

When building a 1-sided sensitivity table, what aspect of the investment is typically analyzed?

The projected timeline for the investment

The potential exit strategies for the investment

The impact of multiple variables on market trends

The impact of a single variable on investment returns (correct)

What is the primary focus when building a 2-sided sensitivity table for real estate investment?

Analyzing the combined impact of two variables on investment returns Signup and view all the answers

What is the purpose of 1-sided sensitivity tables?

Test the impact of changing one assumption on unlimited dependent variables Signup and view all the answers

What impact does an increase in interest rate have on Levered IRR in real estate investment?

It leads to a decrease in Levered IRR due to higher deal costs from increased interest costs. Signup and view all the answers

What effect does a decrease in LTV have on Levered IRR in real estate investment?

It leads to a decrease in Levered IRR as more equity is required to be invested. Signup and view all the answers

What is the purpose of sensitivity analysis in real estate investment?

To evaluate risks and understand their impact on returns. Signup and view all the answers

What impact does an increase in interest rate have on Levered IRR?

It decreases due to higher deal costs from increased interest costs Signup and view all the answers

What type of analysis do investors use to evaluate risks and understand their impact on returns?

Sensitivity analysis Signup and view all the answers

Study Notes

Impact of Interest Rate and LTV Changes on Real Estate Investment

Testing interest rate increase and LTV decrease helps investors understand their impact on future investments.
Increase in interest rate leads to decrease in Levered IRR due to higher deal costs from increased interest costs.
Decrease in LTV also decreases Levered IRR as more equity is required to be invested.
San Francisco's vacancy rate increased from 5% to 24.8% in two years, impacting investor returns.
Increase in vacancy from 5% to 25% in San Francisco led to a 16% decrease in BT IRR.
Investors use sensitivity analysis to evaluate risks and understand their impact on returns.
A Q4 2019 San Francisco office report showed minimal vacancy and increasing asking rents.
An example model based on Q4 2019 assumptions showed an 8.3% levered IRR.
By Q3 2023, San Francisco market sentiment changed significantly with decreasing rents and high vacancy.
Negative rental growth rate and increased exit cap rate led to a -22% IRR in San Francisco.
Detailed, step-by-step videos on building sensitivity tables in Excel are available.
The text provides resources for further learning on sensitivity tables and their construction in Excel.

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Description

Test your knowledge of sensitivity analysis and its practical application in real estate investment decision-making with this quiz. Assess your understanding of key concepts such as 1-sided and 2-sided sensitivity tables, evaluating the impact of assumptions on investment returns, and analyzing the effects of interest rate and LTV changes on investment performance.