The deal may look great in your underwriting model, but there is always the question of ‘what if…’

• What if you didn’t achieve the projected rent premiums?

• What if operating expenses are 20% higher?

• What if the property sells at a higher cap rate?

Stress testing your deal will allow you to see how different ‘what if’ scenarios could effect the outcome of your deal.

Here are 3 ways you can stress test your potential acquisitions:

1. Operations Stress Test

This is a no nonsense way to look at how your cash flow could change, based on if your income or expenses were to be higher (or lower).

The variable inputs (blue) to the right of the table allow us to view effective gross income and operating expenses if they were X% higher or X% lower. After debt service is paid, you can see how this effects your levered cash flow.

2. Proforma Rents

Underwriting to rents the property can actually achieve is critical! Of course, you need to check comparable properties in the area, verify the rents with a property management company etc.

But one thing you can do is research the median household income in the area and verify that residents in that specific submarket can actually afford your projected rent increases.

A good rule of thumb is to make sure your residents are making 3x the rent amount, as shown in the picture.

This Affordability Test is featured in our Multifamily Value-Add Model, but you can also download the calculation test here. (File > Download) Enjoy!

3. Sensitivity Tables

They are a visual what-if analysis of the unknown variables and how they can change throughout the life of the investment.

The purpose of a sensitivity analysis is to quickly view how different scenarios will effect your project returns. These tables can help you see a variety of outcomes and can also show your investors what happens to the financial metrics in different scenarios.

The above example shows a 3-variable sensitivity table. Learn how to create a sensitivity table like this in our free blog.

Whenever you’re ready, be sure to check out the Next Level Value-Add Underwriting model.

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📈 Chart of The Week

Charlotte Neighborhood Doubles Apartment Supply Volumes

Across the Charlotte market, existing inventory increased by 75,062 apartments in the last decade, equaling an expansion rate of 51.6%, according to data from RealPage Market Analytics. That growth rate ranked #1 among the nation’s largest 50 markets and took Charlotte’s existing inventory to 220,656 units as of mid-2023.

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