Risk
Stress Test the Deal: Try to Break It on Purpose
A deal that only works in the best case is not a deal. Try to break it on purpose, and see whether it survives.
Model three failures, one at a time
Take your normalized numbers and push each of the three things most likely to go wrong, separately, so you can see which one the deal is most sensitive to.
- Lower occupancy. Drop occupancy to a conservative, trailing level and watch what happens to NOI and DSCR. Use the break-even occupancy calculator to find the point where cash flow hits zero.
- Higher interest rate. If there is a balloon, model the refinance at a materially higher rate. The DSCR calculator shows whether the loan still covers at the new payment.
- Higher expenses. Push insurance, utilities, and repairs up. In many markets insurance alone can move enough to matter.
Then run all three at once
The real test is the combined case: lower occupancy, a higher refinance rate, and higher expenses together. A deal whose DSCR and cash-on-cash still clear your personal minimums under all three at once is a genuine opportunity. One that only works when everything goes right is an optimistic bet dressed up as an investment.
Set the bar before you look
Decide your minimum DSCR and cash-on-cash in advance, then judge the stressed numbers against that bar. Setting the target after you see the results is how buyers talk themselves into deals.
Put it to work
The underwriter runs downside scenarios for you and shows the break-even point where the deal stops covering its debt. Underwrite a deal free.
Questions
How hard should I stress a deal?
Hard enough to reflect a real bad year: a meaningful occupancy drop, a refinance a few points higher, and higher insurance and repairs. If it survives all three at once above your minimums, it has genuine margin of safety.
What is break-even occupancy?
The occupancy at which income exactly covers operating expenses plus debt service, the point where cash flow is zero. The gap between break-even and your expected occupancy is your cushion.
Related guides
Part of the RVP Underwriter guide library: practical guides to underwriting and buying income property. Browse all guides, or read the complete free guide with a full worked example.