When my father and I started investing in real estate in Modesto nearly two years ago, the market just started to see prices firming up. Homes would go from active to pending quickly but not rapidly as what it has become today. Now you are competing with multiple cash offers. With such demand, there is surely some validity that values have appreciated more than 25 to 30% annually for the last two years, and with strong expectations of continued appreciation of 25% next year.
As it started to become more and more difficult to acquire homes, we started to look for other areas and neighborhoods where we can invest. The key was to find areas where values had significantly fallen after the 2006 collapse and were on the path to rapid recovery. Home values had fallen so low that from a cost per square foot perspective, it would be cheaper to buy a house rather to construct it on your own. For example, two years ago many properties were selling for $75 per square foot, and even now they are around $125 per square foot. Not only were these homes great investments from a rental income perspective but more importantly from an appreciation perspective.
We ended up coming across tons of data from Zillow and GreatSchools on important metrics relevant to finding regions that were expected to have a high level of growth. With this data, we created a spreadsheet and are sharing it today in order to connect with others also interested in investing in rebounding real estate.
In order to evaluate regions, we considered the following key pieces of information:
- Median Value: As investors, we are primarily looking for single-family homes (3 bd/2 ba) between $100K – $250K. Homes in this range are typically strong candidates for long-term growth and are ideal in terms of capital required and return on investment.
- $ / sqft: Ideally, we would like this price to be below the construction cost. This metric is important to consider when looking at newly developed areas as homes are still not being built because home values from a $ / sqft perspective are lower than the construction cost. For us, we have put a cap of $150 / sqft in order to have room to grow and appreciate in value.
- YoY: We are looking for significant year over year growth. Ex. Modesto area is seeing +30% YoY growth. Ideal regions will be at least growing more than 20% year over year.
- % Fall from Peak: Our focus is to primarily find regions where there has been a significant decline in home values in the past five years with strong indications of growth. We are focused on the rebound as appreciation is where the more significant return lies. Ex. Regions like Modesto are still around -50% from their peak despite strong YoY growth.
- Price to Rent Ratio: How quickly can we get a return on our investment if we just considered rental income? Ex. Rent Ratio = Home Value / Annual Rent. Rent Ratio = $120K / (Monthly Rent $1K * 12 months) = 10. We want to look for rent ratios around the range of 10 – 15. This would allow ideal return from a rental income and appreciation perspective.
- Average GreatSchools Rating: We’ve taken a very rough average of the ten nearest schools in the neighborhood to get a general understanding of the area. Schools are fundamental to highly appreciating areas and provide strong indications of growth for neighborhoods as well as parallel metrics such as crime.
- Size Rank: How large is the city? The smaller the number, the larger the city is in size. Size Rank gives us better insight on the long-term growth and the future of the neighborhood.
These seven metrics are the core to understanding what regions are rebounding. With it, we are able to dive deeper on the most lucrative regions to invest in and understand the strong foundation that would allow home values in the respective regions to appreciate.
I’m looking forward to hearing from you whether you are an investor, realtor or simply just interested in learning more. My goal is to connect with those who have similar interests in order to create the building blocks to further develop and expand this opportunity.
If you are interested in a one-page report and grade for your potential investment, please fill out the form here.
Be sure to download the market analysis on neighborhoods here.
Looking forward to hearing from you,