Investors

How do I run a sensitivity analysis for a worst-case downturn?

By Steve Lockhart

The short answer

Start with the base case, the set of numbers you believe in on a normal year: rent, vacancy, expenses, financing, and a sale or refinance price at the end of your hold.

Full answer

Start with the base case, the set of numbers you believe in on a normal year: rent, vacancy, expenses, financing, and a sale or refinance price at the end of your hold. Then change one assumption at a time and watch what moves: occupancy lower, rent lower, the rate on your financing higher, the exit price softer. The point of changing one at a time is to see which single variable your deal lives or dies on, and that is the variable to underwrite most carefully.

Then run the hard version together: lower occupancy, softer rent, a higher rate, and a weaker exit all at once, the way a real downturn actually arrives. The combined case is the honest stress test, and the answer you are looking for is simple: does the property still pay for itself, or cash flow acceptably, or hold its equity, when several things go wrong at once? Keep every input and assumption visible so the analysis can be questioned, and keep the figures approximate, because the goal is direction and cushion, not false precision.

Use the result before you buy. If the deal survives the combined downside, you know your margin and you can commit with your eyes open. If it fails, that is the price of the deal, and walking away is a strategy, not a failure. I run these scenarios on every investment purchase, and I can build the sensitivity table with you on your specific property and financing.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

Which assumptions matter most in a stress test?

Occupancy, rent levels, financing cost, and exit price tend to move the result most, and they are the same inputs that move together in a downturn. Test each one alone to find your weakest point, then combine the worst versions to see whether the property still works.

How deep should the worst case go?

Deep enough to be useful, not so deep it is theater. Use a downturn you can actually imagine from local history: occupancy and rent below trend for a couple of years, a rate that is higher when you refinance, and an exit price that gives back some of the appreciation. The goal is a range you can plan around, not a panic figure.

Do I need software to do this?

No. A spreadsheet, or even a careful table with a pencil, works fine. The value is in showing the inputs, changing one at a time and then together, and keeping the assumptions visible so the analysis can be tested and corrected by anyone on your team.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: we underwrite the base case, then we run the downside together, and we only buy when the property still makes sense in that version of the numbers. The cushion you build in the quiet years is what carries you through the loud ones, and I want that decided on paper before you are anywhere near a contract.

Schedule a Consultation