Sensitivity Analysis for Apartment Deals: A Worked Example
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Sensitivity analysis changes one or two assumptions in an apartment deal model at a time, such as vacancy, expenses, the exit cap rate or the interest rate, and records how net operating income (NOI), debt service coverage and returns respond. It answers a plain question: how wrong can the plan be before something breaks? A sponsor who raises equity with DoorRaise should be able to show the answer to investors, because a single projected case is a forecast, not a promise.
This post explains how to run the analysis, which inputs to test first and how to read a two-way table. It builds on the worked example in how to underwrite a 20-unit building.
What is sensitivity analysis?
It is a set of "what if" runs of the same model. Each run changes an assumption and everything else follows from the formulas. It differs from a scenario, which changes several assumptions together into a story, such as "recession." Both are useful. Sensitivity analysis tells you which input to worry about, and scenarios tell you how a bundle of inputs plays out.
Which inputs should you test first?
- Vacancy and collections. See economic vs. physical occupancy.
- Operating expenses, especially taxes and insurance. See property tax reassessment.
- Rent growth. See rent growth assumptions.
- Exit cap rate. See exit cap rate assumptions.
- Interest rate, if the loan is floating or must be refinanced. See interest rate caps.
- Renovation cost and timing, for value-add plans. See the value-add business plan.
A hypothetical two-way table
This example is hypothetical, for illustration only, and reuses the made-up 20-unit building from our underwriting example: gross potential rent of $264,000, 3% loss to lease, 2% concessions and bad debt, $12,000 of other income, $107,000 of operating expenses and annual debt service of $111,497. The table varies vacancy and operating expenses.
| Vacancy | Expenses at base ($107,000) | Expenses +10% ($117,700) |
|---|---|---|
| 5% | NOI $142,600, DSCR 1.28 | NOI $131,900, DSCR 1.18 |
| 7% (base) | NOI $137,320, DSCR 1.23 | NOI $126,620, DSCR 1.14 |
| 10% | NOI $129,400, DSCR 1.16 | NOI $118,700, DSCR 1.06 |
| 15% | NOI $116,200, DSCR 1.04 | NOI $105,500, DSCR 0.95 |
Debt service coverage ratio (DSCR) is NOI divided by annual debt service. The last cell is below 1.00, which means NOI does not cover the loan payment. In this made-up example, a combination of 15% vacancy and 10% higher expenses is the break point for the loan, and a lender's covenant would probably be hit earlier. You would then ask: how likely is 15% vacancy in this market, and what reserves or equity cushion cover it?
How do you read the results?
- Look for the first red cell, not the worst one.
- Compare the break point with history. Has this property or market had vacancy that high?
- Decide what the plan does at the break point: use reserves, cut distributions, ask lenders for relief or inject equity. Write it down.
- Present results as ranges and show the downside. Never present a single case as a forecast.
Which tools should you use?
A spreadsheet with inputs on one sheet and formulas that read from them lets you change one cell and watch the outputs. Most spreadsheets also have a data table feature for two-way tables. Keep the inputs labelled and the formulas visible so reviewers can follow them.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). It prepares the offering documents from the sponsor's inputs, coordinates escrow with Enterprise Bank & Trust, collects investor funds by wire only and handles filings. The deal page lets you show investors your base case and downside assumptions, with the risk factors. DoorRaise does not verify a seller's or a sponsor's numbers; sponsors must check what they present.
DoorRaise is for apartment buildings with 5 or more units, and sponsors can launch their deal here. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
To get started, create your sponsor page or see the fees.
FAQ
What is sensitivity analysis in real estate?
It is testing how a model's results change when one or two assumptions change, to find which inputs matter most and where the deal breaks.
What is the difference between sensitivity analysis and scenario analysis?
Sensitivity analysis changes one or two inputs while the rest stay fixed. Scenario analysis changes several inputs together to describe a situation.
What should a sponsor show investors?
At least a base case and a downside case with the assumptions behind each, labelled as projections that are not guaranteed, and the break-even point.
How many cases should a deal model have?
Enough to show the main risks. Three is common (base, downside, upside), but the downside deserves the most attention.
Does sensitivity analysis predict returns?
No. It shows how outcomes respond to assumptions. It does not make any outcome likely or guaranteed.
Sources
- Fannie Mae, Multifamily fixed-rate mortgage loans
- 17 CFR 240.10b-5, Employment of manipulative and deceptive devices
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.