How a Rent Scenario Analysis Can Profit Your Real Estate Investment Decisions

jim kobzeff

by James Kobzeff
June 15, 2018

Real estate investors commonly conduct a real estate analysis for rental income properties they are considering to sell or to purchase in order to help them make the most profitable invesment decision.

A Rent Scenario Analysis provides investors one such evaluation method.

What it Does

The idea is to give investors the opportunity to evalualate how the property's income stream might be affected based on a range of possible rent scenarios rather than just to accept whatever income is produced by one-set of rents currently being collected.

For instance, if a ten-unit apartment complex consisting of all one bedroom one bath units are currently rented at $1,500 per month, computations for cash flow, rates of return, and sales value would all be based on that income generated. If $1,500 is a realistic market rent, all is well and good. But here's the problem: it might not be realistic; thus the property's financial performance and estimated value would be skewed.

Okay, now consider how this could play out.

  • If current rents are below market average, the sales price might be computed lower than it should, and the seller could wind up giving the property away; or the buyer might not recognize the upside potential and could walk away from a good investment opportunity.
  • If the current rents are "pie-in-the-sky", the property may be over priced and never sell; or the buyer might unwittingly over pay for the asset.

Fair enough. So a rent scenario analysis would profit any real estate investor (selling or buying), how? It enables the investor to examine a property's financial performance (and resulting price) based on a series of three rent variables rather than just one.

  • Worst-case. If rents decline or do not change at all
  • Most-likely case. The most probable rents that can be obtained
  • Best-case. Rents beyond your wildest dreams

Example

The image below is a screenshot of the Rent Scenarios report provided in ProAPOD Real Estate Investment Software. An explanation is included below the image.

rent scenarios form

The left (grey-shaded) portion of the report shows the property's current rent and performance data. The right (white) portion shows the three possible rent scenarios along with the re-calculated data based on those rent scenarios.

  • Rent Scenario 1 "Worst case"
  • Rent Scenario 2 "Most-likely case"
  • Rent Scenario 3 "Best-case"

As you can see, by conducting this real estate analysis we discover a probable rent upside potential in the most-likely case (scenario 2). Something real estate investors might have overlooked without this analysis.

Here's to your real estate investing success.

So You Know

ProAPOD's Agent 6 and Executive 10 real estate investing software solutions each provide you with the option to do a rent scenarios analysis and subsequently create the report for your next evaluation or presentation.

james kobzeff author

James Kobzeff is a former realtor with over thirty years of investment property experience and is the owner/developer of ProAPOD Real Estate Software.