So you found a great real estate deal and all the numbers look good to make this a profitable investment. Should you go for it? The answer to that question often becomes easier after a couple of simple stress tests to determine what happens if things turn bad. Stress testing is one of the most important analysis tools when underwriting a deal but is often overlooked in favor of focusing on best case scenarios. A good stress test model will show you what the downsides of the investment and how much stress your deal can take before you're reaching into your pocket to keep the property out of foreclosure.
There are various ways to stress test a deal and different types of properties as well as different business plans will determine the tests you should perform. Here are a couple of common ones that apply to most deals and I recommend working them into your financial analysis of the deal before signing the purchase agreement.
To get more detailed information on stress testing and underwriting in general, I highly recommend reading the book:
The Definitive Guide to Underwriting Multifamily Acquisitions by Robert Beardsley