The Ratio Analysis and the Partitioning of the IRR are key metrics in the analysis of potential real estate investments.  This section of our analysis is crucial. The ratios will provide investors with an idea of the expected returns and the risk associated with the investment. We will cover all the ratios in detail. Although you may find it challenging, it will not be overwhelming.

Ratios are widely used to gauge the reasonableness of relationships between various measures of value and performance:  income multipliers express the relationship between market value and operating income; operating ratios highlight the relationship between gross income and operating expenses; break-even ratios show the percentage of gross income required to meet cash expenditure requirements; and debt coverage ratios show the relationship between net operating income and debt service obligations.

Partitioning and sensitivity analysis are useful means of sharpening risk perception.  They do this by illustrating how varying degrees of error in different elements of a forecast result in discrepancies between estimated and actual cash flows.