How do you test different investment scenarios for maximum returns?

1 Define your goals and criteria

The first step to test different investment scenarios is to define your goals and criteria for each potential deal. What are your target returns, cash flow, equity, and holding period? What are the minimum and maximum values for each variable? How do you measure your performance, such as cash-on-cash return, internal rate of return, or net present value? By setting clear and realistic goals and criteria, you can narrow down your options and focus on the most promising scenarios.

2 Gather data and assumptions

The next step is to gather data and assumptions for each investment scenario. You need to collect information on the property's location, condition, market value, rental income, expenses, vacancy rate, appreciation rate, and capital expenditures. You also need to make assumptions on the financing terms, such as interest rate, loan-to-value ratio, amortization period, and closing costs. You can use online sources, local experts, or your own experience to find reliable data and assumptions.

3 Use a spreadsheet or software

The third step is to use a spreadsheet or software to analyze and compare different investment scenarios. You can create your own spreadsheet or use a template to calculate the key metrics and indicators for each scenario, such as cash flow, net operating income, debt service, cash-on-cash return, internal rate of return, net present value, and return on equity. You can also use a software tool or app that specializes in real estate investment analysis, such as DealCheck, BiggerPockets, or RealData. These tools can help you automate the calculations, visualize the results, and generate reports.

4 Run sensitivity and scenario analysis

The fourth step is to run sensitivity and scenario analysis to test how different variables affect your returns and risks. Sensitivity analysis involves changing one variable at a time and observing how it impacts the outcome, such as changing the interest rate, rental income, or appreciation rate. Scenario analysis involves changing multiple variables at once and creating different scenarios, such as best case, worst case, and base case. By running sensitivity and scenario analysis, you can identify the most critical factors, assess the range of possible outcomes, and plan for contingencies.

5 Compare and rank the scenarios

The final step is to compare and rank the scenarios based on your goals and criteria. You can use a scoring system or a matrix to evaluate each scenario on multiple dimensions, such as return, risk, feasibility, and alignment. You can also use a decision tree or a weighted average to combine the scores and rank the scenarios. By comparing and ranking the scenarios, you can select the best one for your situation and goals.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?