Also referred to as Probabilistic Analysis, Stochastic Analysis involves adding uncertainty to some or all of the inputs to the analysis such that the outcomes are likewise uncertain. In real estate financial modeling, this form of analysis allows the professional to better understand the range of outcomes (i.e. risk) possible in an investment.
The process of performing Stochastic Analysis first requires assigning probabilities to inputs, and then simulating scenarios over and over again to capture the various outcomes that result from the uncertain inputs.
Stochastic Analysis is often paired with a technique known as the Monte Carlo method. This method involves repeatedly running simulations hundreds or thousands of times, recording the outcomes of each simulation, and then aggregating those outcomes to understand the mean (i.e. most probable outcome), standard deviation (i.e. range of outcomes), minimum value, and maximum value of all of the outcomes.