Definition
A Sensitivity Table is a financial modeling tool used in real estate underwriting to show how changes in key assumptions affect projected returns, value, or performance metrics.
In simple terms: it shows “what happens if things change.â€
Purpose in Real Estate
- Stress-test underwriting assumptions.
- Evaluate downside risk.
- Assess impact of market shifts.
- Support investment decision-making.
Common Variables Tested
- Exit Cap Rate
- Purchase price
- Rent growth rate
- Vacancy rate
- Operating expense growth
- Interest rate on debt
- Exit year timing
Typical Format
A sensitivity table usually shows two variables across rows and columns, with each cell displaying the resulting IRR, equity multiple, or property value.
Example (IRR Sensitivity to Exit Cap Rate & Rent Growth)
| Exit Cap \ Rent Growth | 2% | 3% | 4% |
|---|---|---|---|
| 5.0% | 17.2% | 18.4% | 19.6% |
| 5.5% | 14.8% | 15.9% | 17.0% |
| 6.0% | 12.5% | 13.6% | 14.7% |
Why It Matters
- Reveals return sensitivity to market volatility.
- Highlights margin of safety.
- Shows impact of cap rate expansion.
- Identifies break-even points.
Downside Risk Analysis
Investors often focus on the “worst reasonable case†scenario in a sensitivity table to evaluate whether the deal still meets minimum return thresholds.
Sensitivity Table vs. Scenario Analysis
- Sensitivity Table: Tests incremental changes in one or two variables.
- Scenario Analysis: Tests a fully defined “base,†“upside,†or “downside†case with multiple variable changes.
Impact on Investment Decisions
- Determines acceptable purchase price range.
- Supports negotiation strategy.
- Influences debt sizing decisions.
- Provides LP reporting transparency.
Common Pitfalls
- Testing unrealistic ranges.
- Ignoring correlated variables.
- Over-reliance on base case.
- Failing to test timing risk.
Investor Checklist
- Stress-test exit cap rate by at least 50–150 basis points.
- Test rent growth below historical averages.
- Evaluate sensitivity to refinance rates.
- Review downside IRR against required return.
- Confirm adequate cushion under worst-case assumptions.