A scenario analysis is a favorite method used by real estate investors and investment property specialists for measuring risk during the process of evaluating real estate investments.
Scenario analysis involves estimating a range of variables that will have the greatest impact upon the likelihood of an investment performing according to an investor’s minimum expectations. From this range of values of a given variable, a discrete (point) estimate is assigned to a scenario.
Typically, the analyst is interested in three scenarios: most likely, best-case, and worst-case scenario. Therefore, the variables’ likely extremes and a most likely outcome are specified in each of these three scenarios. In turn, each variable that is likely to influence an investment is considered.
The Rent Scenarios report created by ProAPOD Real Estate Investment Software is a good example of a scenario analysis that can be used to gauge the performance of the potential investment based upon the property’s rental income.
This can be accomplished quickly and easily with the Scenarios form provided in ProAPOD Real Estate Investment Software. The form essentially has two parts. One part (shaded in light grey) that shows the income and measures based on data provided by the user in the other forms, and one part (a white background) that allows the user to enter three rent scenarios inside the columns labeled Scenario-1, Scenario-2, and Scenario-3.
In this case, Scenario-1 represents the “worst-case” scenario (the monthly rent that is attainable no matter what), Scenario-2 the “most-likely” scenario (a very realistic monthly rent), and Scenario-3 the “best-case” scenario (a monthly rent beyond the wildest dreams).
As the rent scenarios are entered, ProAPOD Real Estate Investment Software automatically computes a series of measures and rates of return based upon those variables that allow the user to examine and compare the results easily. Moreover, the Rent Scenarios report is printable so you can present it to sellers and buyers.
This report has helped me more then once. During a listing presentation, for example, I was able to show the seller that the rents he projected for his income property (nowhere near the rents he was actually receiving) resulted in extremely unfavorable cap rates and did not support the price that he wanted to ask. In other words, the income he originally intended for me to use to market the property (to justify his price) proved to be “pie-in-the-sky”. He did relent, and I was able to take a realistic (not over-priced) listing that eventually sold.
The rent scenarios analysis also has helped me with investors. More then once I was able to show a buyer that a property had good “upside potential” (the rents could be realistically raised). Therein making the price at which the property was being offered a very solid investment opportunity. This approach has kept many investors who otherwise might have walked away instead to write an offer and purchase an income property that had enormous income potential.
If you are currently using ProAPOD Real Estate Investment Software for your rental property analysis, be sure to take advantage of our Rent Scenarios report. You might be amazed how this one report can make sellers and buyers rethink their position and react in a more realistic manner.
