Category: Screening for Properties

Selecting Investment Zip Code

Objective

Now that we have acquired numerous data points pointing to a few potential zip codes, we will work on filtering through the information and summarizing the data to make a decision.

This section involves subjective decision making when it comes to weighting of certain factors over others. I have selected a basic strategy of assigning equal weight to each of the factors. In reality, some of the factors may more or less heavily weighted based on an investor’s investment strategy, risk profile, and geography of the property.

Putting it all together

Using the analysis from my posts about IRS zip code data and risk management, we can build a model that focuses on two drivers of value: (1) demographic information contained in the IRS data and (2)  market data  related to pricing. Based on the previous color schemes, I assigned a value of 2 for green rows, 1 for yellow rows, and 0 for red rows. Surprisingly, none of the zip codes achieved a “perfect” 4, and only 2 zip codes scored a 3. The general trend indicated that the areas with favorable demographic information may be getting overheated.

Summary of Results

With the data, I focused on the two zip codes that scored a 3. While it may be generally to broaden the search to those two zip codes, I want to select just 1 zip code to focus the analysis. I reviewed the data, and see that the 30067 zip code scored a yellow on the IRS data and a green on the deal data. The 30328 zip code scored in reverse. I dive a bit deeper in the IRS data to get the story.

I see that, for the zip code 30067, state income and sales tax increased faster than GA. Furthermore, salary & wages and business income grew strong as well. Interestingly, real estate taxes fell faster than the state of GA. I note to research later for the zip code to understand why real estate taxes are falling almost double that than the entire state. Overall, some of the factors that ‘underperformed’ are something I can live with, but the favorable pricing for this zip code outweigh the demographic negatives. So, I will focus the rest of the analysis on locating a property in 30067.

30067 zip code.png

As I look on the map, I can note several cities that have done well over the past couple of years and understand the potential story for that area to potentially grow and enhance my return. In addition, I note that additional construction for the new Atlanta Braves stadium will go up near the area. Over the next couple of years, many potential catalysts could exist for rising prices. In the next couple of posts, I’ll explore some of the more local-based research to find the right properties quickly.

Summary

Using the previous analyses, we have now selected a zip code we will focus on. There has been a lot of subjective input I have put in to decide the location, but always remember to test the strategy and assumptions during due diligence.

Screening for Residential Real Estate Investment Opportunities – Part 2

Objective

In my last post about Screening for Investment Opportunities, I discussed a zip-code approach utilizing IRS data trends for the past few years. Looking at the same geography, I wanted to post another method to quickly compare different zip codes by using current, demographic information.

Zip Code Level Data via Moving.Com

Many websites focused on various aspects of people moving will offer information services so people rely on them as a one stop shop. One particular website – Moving.com – provides easy-to-access demographic information for zip codes across the US. Clicking the link above will take you to a screen shown below:

Moving.Com image - 1

As shown above, you can type in the zip code and click “Get Report” to access the information below:

Moving.Com image - 2

While this is just a snapshot of the detailed information, the different sections presented include:

  • Demographics
  • Income and Jobs
  • Ethnicity
  • Education
  • Climate
  • Crime
  • Residential

I used various data points from these pages across the same zip codes used in my previous post. I compared the data to National figures and the median of the selected zip codes as the benchmark and came up with the following screen below. The “Value” column aggregates the number of times each zip code ‘outperformed’ the national benchmark and the median of the zip codes (a total of 2 points for each factor). While this method is very generic, potential investors may feel the need to experiment with their weighting schedule if they feel certain factors are more important than others. Weight based on your gut instinct, if you don’t know how important something is… research it.

I utilized the same tranches as before: (1) Green – High Growth, (2) Yellow – Potential Growth, and (3) Red – Low Growth.

First set of factors:

Analysis - 1

The second set of factors and the value for each zip code are below. Keep in mind, the specific zip code will of course not “outperform” the national index when it comes to factors such as Homes Owned and the number of Graduate degrees (above). Using my formula, the same logic would be applied to all of the zip codes, so we can ignore the impact of this hole in the analysis.

Analysis 2

For comparability, we can look at the map to see where the zip codes lay:

Map of GA

Now that we have two data sets of analysis for the zip codes I am interested in, I can begin to dive deeper by focusing on what type of risk do I want to take, what is my investment horizon, what are the trade-offs between these zip codes, what sort of return am I looking for (note that the return question comes after your risk management questions), etc. We can also compare the analysis from the IRS data we analyzed earlier to see the overlap between the two data sets.

Conclusion

Now that we have looked at the overall trends, we see there are certainly some zip codes that have historically outperformed others. As always in finance, you have to remember that the past is no indication of the future. The next step in the analysis that we will explore over the next couple of posts focuses on risk management techniques.

Screening for Residential Real Estate Investment Opportunities

Objective

The first step in any search for investing is to screen the prospective properties to invest in. An immediate impulse is to jump to Trulia or Craigslist in order to find potential opportunities, ignoring the trends for the specific property. The first objective in locating a suitable investment involves actively screening for areas by finding key trends, including:

  • Increasing home values
  • Stability in value
  • Low crime
  • Good schools
  • The right tenants

While this list is certainly not exhaustive, the purpose of screening is to find general areas that make sense, before you jump in to locate the best deals.

Zip Code Level Data via the IRS

One potential way to search for certain trends is to utilize IRS data on a zip code level. The IRS collects and distributes certain data points collected from everyone’s tax returns. Click here to access the website.

Once you click the link above, you will be directed to the following page, you can locate the tax year(s) you wish to use in your analysis:

IRS Website.png

As you can see, the data is only available through 2013, so the analysis will not be as up-to-date as we would like it to be. However, the data allows us to gain a sneak peak into such factors as:

  • Tax revenue growth
  • Unemployment trends
  • Salary/Wage growth
  • Business income
  • Dependents

Each of these factors can be compared to general rates in the state of Georgia (per my example below). For example, a recent search I performed was focused on finding potential zip codes to focus on in north Atlanta. Here is the map I focused on (created with ZipMap.Net):

Map of GA.png

I decided to look back for a period of 5 years to see the growth of each of the zip codes since the bottom of the Great Recession in 2008-2009. I downloaded the information, created a small model for myself to look at the 4-year change through 2013 for a number of different factors listed below (I have used a couple of acronyms, feel free to ask if you cannot decipher any of the data points). The zip code “00000” corresponds to all of GA:

Data Set 1Data Set 2

While there is certainly additional information I could have included, this is a quick way to see potential opportunities before diving in deeper. With the data, I looked at each of the respective zip codes versus the state of GA and calculated the number of times each zip code outperformed the state as a whole (using a simple binary system illustrated below). After, I separated the zip codes into three tranches: (1) Green – High Growth, (2) Yellow – Potential Growth, and (3) Red – Low Growth.

Summary of Findings.png

From here, I have a list of potential zip codes I can focus on, instead of blindly looking for deals. Of course, we want to drill down a bit further once we have refined our focus. Follow me on this blog and I will explore different points of analysis that we can incorporate.

Summary

The IRS data can be a powerful source of data to locate trends within zip codes. It helps to find investments by locating increasing tax revenues in certain jurisdictions, information about the jobs and businesses in certain areas, and the type of people moving in versus moving out (i.e., increasing SSI benefits may indicate more retirees moving in and more stable sources of potential investment income). The trick is finding the data and revealing the story that is screaming out at you.