As demand for single-family rental homes rises, more and more real estate agents today are working with clients who are looking to invest in property and cash in on the demand. However, playing the game can come with some risk.
One company is hoping to take the risk out of real estate investing.
Roofstock, an online marketplace for single-family rental home investment, has taken the wraps off its new single-family rental ratings index for U.S. neighborhoods. Founded in 2015, it provides its clients with research, analytics and insights to evaluate and purchase independently certified properties at set prices.
The index uses an algorithm that assesses neighborhood-specific risk. It normalizes neighborhood data across markets, enabling investors to compare rental properties in different neighborhoods on a level playing field and make a more informed decision.
The Roofstock Neighborhood Rating is computed at the census tract level, providing investors with an added layer of localized insight when measuring the risk vs. reward trade-off.
“Roofstock’s innovative approach provides a new level of transparency and data, breaking down the traditional barriers that once existed in the property investment sector,” Gary Beasley, chief executive officer and co-founder of Roofstock, said in a statement. “By compiling information at the U.S. census tract level, including income, crime, schools, property values and the nature of housing stock, our new Neighborhood Ratings index offers all investors access to the most vital information needed to make informed investment decisions.”
When comparing properties in different neighborhood, it is imperative to have valid inter- and intra-market data for comparison to build a universal SFR neighborhood rating.
Over the years, the consumer price index (CPI) has served as a basis of comparison for homes in different neighborhoods. However, CPIs are not complete cost-of-living indexes and investors should avoid them for place-to-place comparisons.
According to Rooftop, the CPI has to clear weaknesses, including the omission of public goods (education, schools, services, low crime rates, etc.) and lack of geographical coverage. The Roofstock Neighborhood Rating uses a novel hierarchical machine learning framework, essentially developing a constant quality standard of living normalization that addresses both of these issues.
The Roofstock Neighborhood Rating algorithm analyzes data across 72,000 U.S. census tracts — each composed of approximately 1,500 homes — to provide a uniform view of neighborhoods nationwide based on dozens of factors, including home values, income levels, employment rates, educational attainment, percent of owner-occupied homes, and elementary, middle and high school district ratings.
The Roofstock Neighborhood Rating then offers a property rating:
5-Star: Very high employment rates. Above average income levels and school district ratings. Newer properties above the average home value and mostly owner-occupied.
4-Star: High employment rates. Average income levels and school district ratings. Average home values. Slightly older properties than in 5-Star neighborhoods, but generally high quality and mostly owner-occupied.
3-Star: Good employment rates. Slightly below average income, with decent school districts. Home values slightly below average. Properties are a mix of new/old, with slightly more owned than rented.
2-Star: Below average employment, income levels, school district ratings and property values. Homes are an equal mix of rented and owned.
1-Star: Lowest employment rate compared to higher-rated neighborhoods. Low income levels, school district ratings and home values. Properties are older, with more rented homes than owner-occupied.
Roofstock’s new index is in its infancy, but it could provide your clients looking to invest with another tool to hone in on the best investment properties.