Farragher and Savage (2008) conducted a recent survey of real estate institutional and private
investors to determine what types of decision-making processes they used when making real estate
investment decisions. Out of the 180 investment officers replying to the survey, only 55% of the
institutional investors and 53% of the private investors considered any type of risk assessment when
analyzing investment deals. The most frequently used techniques included sensitivity analysis, scenario
analysis, breakeven analysis and debt coverage ratios. The findings showed that only 2% of investors
used probabilistic techniques, such as Monte Carlo simulations in their analysis. Metrics used in making
investment decisions included first year or going-in measures of equity before tax cash flows (cash-oncash),
equity dividend rate, and overall holding period metrics including internal rate of return (IRR) and
net present value (NPV). The authors compared their results to a similar study conducted in 1996 by
Farragher and Kleiman. The comparisons revealed little had changed in the investment decision
process since that time. The authors noted the obvious need for real estate investment companies to
more fully assess quantitative risk in the decision making process. Such observations should translate
into analytical tools and courses that facilitate the learning and decision processes related to modeling
and risk analysis.