Here is a story I like to share, because it is so common in our industry:
Some time ago, an individual real estate investor reached out for assistance in acquiring residential rental property to build a portfolio with steady cash flow. He was having difficulty finding any opportunities in his hometown real estate market, so he had concluded he needed to look beyond his own “back yard.”
In the weeks that followed, he explored numerous markets across the country. Blog posts, websites, articles and countless other resources provided an endless stream of information to consume. The result: he was stuck in the mud studying the dirt.
Paralysis through analysis of the wrong things in residential rental property
We’ve all been there, and I was more than happy to throw a winch line to my colleague to help pull him from his data entanglement.
As a first step, I applauded him for his efforts to better understand his investment options across multiple locations and for his diligent search for the right location. However, the secret to location is that there is no secret, no “silver bullet.”
In today’s data-rich world, we possess all the information necessary to make well-guided, educated investment decisions accounting for location risk. Over the past decade we have studied the performance of thousands of rental properties. This has enabled us to statistically prove that location characteristics influence the performance of residential rental property.
Finding high, low or no-risk rental locations
To get you thinking about location risk, let’s begin with a simple, common-sense question.:
First, list the top 10 characteristics you feel influence the risk associated with a location. Does your list include any of these:
1. Crime
2. Schools
3. Jobs
If so, congratulations. That means you are on target for data selection. At RentFax, we analyzed more than 500 different data points to determine those with the strongest correlations to historical performance.
Second, gather data on those characteristics at a geographic level as small as possible (think neighborhood versus city or even ZIP code). We partnered with one of the leading national data providers to help us with this task of providing accurate data for every Census Tract in the country (more than 74,000 of them).
Then comes the hard part — and the point in the investment process where my colleague above “got stuck” (as do many others). The final step is establishing the relationship between the location characteristic data and predicted performance, what we call the Rental Income Stability Composite (RISC™) Index.
Rental Income Stability Composite Index
This composite index (or score, as many prefer) is a measure of a location’s risk for rental property financial performance based upon data as statistically derived from historical performance. In other words, it is the “credit score” for rental properties across the country. The RISC score provides us with a measure of performance volatility (risk) to use in conjunction with projected rewards (income), giving us the insight to evaluate opportunities across the country.
Since we already know that there is no “silver bullet” in risk management, the RISC score becomes a tool to support efficient and objective decisions. I urge you to continue your risk management efforts in your investments, and I can assure you with confidence that your efforts to understand location risk will be richly rewarded.
You can download a free Location Due Diligence Checklist at www.RentFaxPro.com or call 844-RENT-FAX.
www.RentFaxPro.com
913-322-7969
ABOUT THE AUTHOR
Shane Sauer is Co-Founder of RentFax and Senior Underwriter for Peak Asset Lending. He holds B.S. and M.S. degrees in Civil Engineering and is a general contractor and appraiser. With decades of investing experience and a passion for educating, Sauer has facilitated the success of investors across the world in their residential real estate investments.
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