Stress Testing Potential Investments

[Account Closed]

When I am evaulating a potental investment, I put it through a series of "stress tests" (to borrow a banking term) to see if it will perform.

What worst-case sceanrios do you look at?

I look at:
-Long Term Vacancy: how much vacancy can I have and still cash flow?
-Crushing Maintenance Costs (every major system fails)
-Declining Rent: how will the cash flow look if asking rent is overestimated?

[Wade Sikkink]

One "test" I used on a recent apartment building we bought was the break even vacancy. I wanted to know at what vacancy level the property would be breaking even and then if I was comfortable that we could keep it above that.

Based on the numbers we had I figured the break even vacancy was around 60% (can't remember the exact number). I felt pretty confident that we could keep the property over 60% occupied. That was another indicator that we had a good deal on our hands.