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.