10 Questions
What is the purpose of sensitivity analysis in real estate investment?
To evaluate the impact of identified risks on investment returns
What is the key outcome of using sensitivity tables in real estate investment?
Evaluating the impact of risks on returns
When building a 1-sided sensitivity table, what aspect of the investment is typically analyzed?
The impact of a single variable on investment returns
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
What is the purpose of 1-sided sensitivity tables?
Test the impact of changing one assumption on unlimited dependent variables
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.
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.
What is the purpose of sensitivity analysis in real estate investment?
To evaluate risks and understand their impact on returns.
What impact does an increase in interest rate have on Levered IRR?
It decreases due to higher deal costs from increased interest costs
What type of analysis do investors use to evaluate risks and understand their impact on returns?
Sensitivity analysis
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.
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.
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