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How to do a Neighborhood Analysis for Real Estate Investing

Joe Torre, RealWealth Investment Counselor

Joe Torre

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Hello, investors. My name is Joe Torre and I’m an investment counselor here at RealWealth. Today, we’re going to discuss how to do a neighborhood analysis for real estate investing.

Here’s the scenario:

You’re thinking of investing out of state and your property provider could be a real estate agent, it could be a turnkey provider, a home builder. They send you a property like this. I just picked one at random. This one’s in Forney, Texas, three-bedroom, two-bath, 1,400 square feet, $263,000. The question is, is this a good place to invest? If you’ve never been there, there’s no way to know, so your options are to fly out there and do a site visit, which takes a lot of time and money, and by the time you get out there and arrange flights, the property might very well be sold, or you can use some online resources to do your due diligence remotely. That’s what we’re going to discuss today. We’re going to go over three sites that can help you get a feel for what the neighborhood looks like and whether it’s a place you want to invest just using online resources.

The first one is called Niche.com. That’s the homepage. You can see there’s a little link there that says Places to Live. You click on that, and then you type in the zip code of the property right here, so in this case, the zip code is 75126, which is Forney, Texas, and it comes up with some general information. Forney on the map is east of Dallas. It’s in the next county over, Kaufman County, but it’s close to Dallas. It’s in the Dallas Metroplex, which is booming, and commuting distance to downtown Dallas.

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At first glance, it looks like a pretty promising place. The neighborhood has a rating of B+, public schools are A, nightlife, diversity, weather, health and fitness, all good marks, As and Bs. The commute, it only gets a C. That’s because it’s a little bit far out from Dallas proper. There are jobs in Forney and in Mesquite and other places, so you don’t have to go into Dallas for work, but because of that, it gets dinged for the commute. Housing, good for families, jobs, all good ratings. Cost of living, a little bit better than average. It’s an affluent area, so it costs more, so it didn’t get an A or B there. Then outdoor activities, it gets a B, and you can see it’s right next to a lake. At first glance, this kind of gives you the lay of the land. You can see where the zip code is and what kind of neighborhood it is. Now we do a deeper dive to get some more information. There’s a wealth of information on this site.

Real Estate Overview, you can see that the medium home value is about $254,000, which is slightly above the national average. The median rent, $1,714, is well above the national average of $1,163. Then, here’s a metric that’s very important, percentage of owners and a percentage of renters in this zip code. I always like to have a property that’s predominantly an owner-occupant neighborhood. Owners take care of their houses. They have pride of ownership. They mow their lawns. They take care. They don’t let junk accumulate on the front lawn. Renters don’t care as much about the property because they don’t own it. If this was reversed, if you had a neighborhood that was 80% renters, the neighborhood could deteriorate a lot faster and not be maintained as well.

The other factor is your exit strategy. When you go to sell the property, if you’re in a predominantly owner-occupant neighborhood, you have multiple exit strategies. You can sell to your tenant. You can sell to another investor. You can sell to an owner who’s going to live there and make it his home. You have a lot of options. If you’re in a neighborhood that’s 80% renters, you pretty much have only one exit strategy, and that’s to sell to another investor, so your pool of available buyers is much smaller. That’s a key metric to look at. Then, drilling down further, under that medium home value, you see a bell-shaped curve about home values. 66% of the properties in this zip code are between $200,000 and $400,000, so these are all good high-end properties, so it’s a good sign for the neighborhood. The median rent too, you have a distribution there over 60% or $1,500 a month and above. All right, Residents. Who lives in this zip code? Median household income is $94,000, which is well above the national average of $69,000. 48% of households are families with children, so that’s a good sign. It makes for a very stable community. Then, education levels, you see a bell-shaped curve there, but most people have some college or bachelor’s degree or master’s degree, so that’s a good indicator for the education level of the neighborhood. You see a link down there, it says more about 7,126 residents. You can click on that and get more drill down.

We already talked about the education level. Male-female split is roughly even, as usual. The age breakout, this is important because you can see that the majority of people in the zip code are of working age. You see 25 to 34, 35 to 44, 45 to 54. These people are in their prime earning years making money, so there were a few retirees, 7% are 65 and older, but mostly, it’s a working area, so that bodes well for the upkeep of the area and the income coming into the neighborhood. The other metric here is racial diversity, and this is a good sign here. You have 54% white, 46% non-white, and it’s broken out 21% African-American, 20% Hispanic, and so forth. This is important for when you have a vacancy. In fact, a couple years ago, I was in San Antonio at the south end of the city and driving around looking at properties, and I felt like I was in Mexico. All the signs were in Spanish, all the grocery stores, all the stores, all the people, all Hispanic. If you’re in a neighborhood that was 99% Hispanic, your pool of available tenants is pretty limited to Hispanics. An Asian guy is not going to feel comfortable living there. A white guy, an African American guy is not going to feel comfortable living there. In this zip code, you have a very diverse ethnic makeup, so when you have a vacancy, you can pretty much appeal to anyone. You can cast a wide net. That’s a key metric to watch.

Income Levels. We talked about the median household income of $94,000. That’s the household income. It has it broken out by household income and individual income. The household income is about twice the individual income. That implies that there’s a lot of dual income families where both spouses work, which kind of makes sense since it’s high with the number of families. Then, some more metrics here. Unemployment rate, 3.3%. It’s good. Poverty rate, 7.5%. I’m not sure what that is. It’s probably these people here who have a household income of under $25,000. Then, non-citizens, only 3.7%. Schools. This is an important thing to look at. How are the schools in this area? You can see the public schools are rated highly. You can click on this link for more detail to see a rating of all 66 public schools in that zip code. Then if you click on this other link where it says private schools, you can see how the private schools are in that area, and there’s 38 private schools in or around 75126. Now, you’re not going to live there and your kids aren’t going to go to school there, but this is an important thing because tenants are going to look at how good are the schools in this area, and this will be a major selling point when you’re trying to find tenants, that the schools in this area are good.

All right. Now we’re going to look at crime. I’m going to go to a different website. This is called bestplaces.net, and this site has a lot of the same information that we saw from the niche.com site, but it has some other information that niche didn’t have. We’ll look at the crime factor. Crime in Forney is well below the national average on a scale of 1 to 100. Forney violent crime is 11.1, which is half the national average, and property crime is 25.6, which is well below the US average. The key thing to focus on here is the violent crime. Property crime, like somebody spray paints graffiti somewhere or somebody breaks a car door and steals something out of a car, that’s bad enough, but violent crime, like muggings and robberies, that sort of thing, that will make your tenants afraid to live there and they’ll leave. They’ll break the lease, especially if they have kids. You want to keep an eye on that violent crime stat, and you can see here that on a scale of 1 to 100, the crime is only 11.1, which is very low. More detail from this site, they have a graph showing violent crime in Forney compared to Texas in general and the United States in general. As you can see, it’s well below the national average or the state average. Also significant is that the crime rate is going down. It’s trending down over time, so this is a positive indicator.

Here’s a third site, city-data.com. I go to this a lot. It has crime statistics as well. They use a more graphical format. Here you see like a traffic signal, green, yellow and red. Red means war zone, don’t go there, yellow means kind of dodgy, and green is safe. This one is in the green. Then, over here on the right, this pie chart shows you the kinds of crime, and you can see it’s similar to the information we got on the other site. Most of it is property crime, 79%. Thefts, assaults, and robberies are a very small percentage overall, so it’s mostly property crime. Then, it also has race information by zip code, which is similar to the information we got from the other site. This has both the numbers, percentages, and a pie chart, so it shows you how diverse this area is. Here’s a piece of information that you don’t get on the other two sites we looked at. This one shows you the housing stock, the year the homes were built in this zip code. You can see there was not much building going on, and then suddenly from 2000 on, most of the houses in this zip code are new. They were built 2000 to 2009, or 2010 to 2019, so that means that it’s a very new neighborhood, good houses, nothing old, dilapidated, broken down. That bodes well for the neighborhood as well.

Okay, so what’s the verdict? What do we think about zip code 75126? It’s in a good location near a major metro, Dallas, with lots of jobs. It’s an affluent neighborhood with a high household income and high home prices. It’s got a diverse ethnic mix, good schools, and low crime, so what’s not to like? Two thumbs up. We like this neighborhood. Now, not all neighborhoods are going to be this good, but this will give you an idea of how you go through the process of looking at different properties, different neighborhoods that you’re not familiar with, and you can get a pretty good feel for the area.

Here’s a list of some resources:

The first three we looked at today, niche.com, bestplaces.net, and city-data.com. Some others you might want to look at are neighborhoodscout.com, and then some specialty sites, greatschools.org, which focuses on schools, and spotcrime.com, which focuses on crime statistics. It’s good to have a bunch of sources of information because as we’ve seen, some sites have information that other sites don’t have. You don’t want to rely on just one site. If you look at multiple sites, you can get a more complete picture of what the neighborhood looks like. Here’s your homework assignment. Knowledge does no good if you don’t apply it. Pick some zip codes that you’re familiar with. Maybe the zip code where you grew up or the zip code where you went to school, or where you’re living now. Some place that you have a good knowledge of, and then go through this exercise, pick out some of these sites, poke around, and see what information you can get about your neighborhood from these sites, and get a feel for how accurate they are.

I think you’ll find they’re pretty accurate. It’s important to get a comfort level because someday when someone sends you a property in Texas or Florida or wherever it is and you’re not familiar with the area, you want to be confident that when you look up and do your due diligence online, that you can be confident of the results and trust them and make decisions about where you want to invest or not.

That’s how you do a neighborhood analysis from your desktop, and that’s a very important skill to have as an investor. If you’re looking at five different areas in the country, you don’t want to fly out to all of them because it takes too much time and too much money. If you can do your due diligence online and eliminate three of the five and focus on the last two, then you can save yourself a lot of time and effort. If you want to learn more and see more webinars like this, you can become a member of RealWealth by clicking the orange Join for Free button in the main menu. We have a library of over 900 webinars on all kinds of real estate investing topics, every aspect of real estate investing. Most of them are about an hour long, more in-depth than this one, and we add to it every week. Every week, we have new webinars, articlesand podcasts that we post.

If you want, whenever you’re ready, you can speak to an experienced investment counselor like myself. I’m one of three investment counselors that can give you answers to your specific questions and guidance about where you want to invest, and it’s all free, so there’s nothing to lose. That’s how you do a neighborhood analysis. I hope you found that worthwhile. Thanks for watching. Bye.

Joe Torre, RealWealth Investment Counselor
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