4 ways to use data and algorithms to inform your real estate investment decisions

Amanda Maher
Amanda Maher | 8 min. read

Published on January 26, 2018

If you were to rely solely on what you hear in the media, you might think that now is a great time to invest in real estate. The economy is strong, rentership continues to grow, and interest rates continue to hover around all-time lows. A novice investor may be tempted to dive in head first.

However, real estate markets are more complex than what the media reports. Real estate is, and always will be, hyper-local in nature. The strength of a real estate market can vary from state to state, city to city—sometimes even block to block.

Case in point: I recently saw a tweet from a real estate agent that read, “Planning to stay in a home for the next 5 years? Then now is a great time to buy! Contact me today!” In my opinion, that’s a major oversimplification of the real estate market. Just ask someone who purchased a home back in 2006, planning to stay for 5 years. By the time that 2011 rolled around, they may have realized that 2006 wasn’t, in fact, a good time to buy—it was the height of the market. In some markets, it would take much longer than 5 years for homes to recover their values from the last market peak.

That’s why it can be so challenging to evaluate real estate deals: It’s both an art and a science.

Real estate is an imperfect market. Not everyone has access to the same data. A local real estate investor may have insights about a property that can’t be found online or at any registry of deeds. Perhaps, for instance, an investor is looking to retire and wants to sell off his portfolio. Someone with hyper-local knowledge of the market may be aware of this opportunity, and can engage the seller directly with those circumstances in mind. Someone’s motivation for selling won’t be included in the MLS listing available to the general public. In that regard, the person with more specific knowledge has the upper hand when negotiating. We put this in the “art” category.

On the flip side, while real estate will never be a perfect market, advances in technology have at least partially leveled the playing field. There’s more granular-level data available to investors than ever before. Those who know how to leverage this data can develop algorithms to inform their investment decisions. Crunching those numbers is the science.

What kind of data are we talking about? Here are 4 examples of how you can leverage real estate data sources to inform investments.

Real Estate Data Sources to Inform Investments

#1: Home Flipping Reports

Data about home flipping trends can be incredibly informative. You can analyze the number of homes being flipped, the home flipping rate as a share of all sales, how saturated a market is with home flippers, etc. You can even calculate the gross yield (the yield on an investment before the deduction of taxes and expenses) for home flip sales. Although it’s tough to determine the exact amount that a contractor spends on a rehab, you can calculate what they purchased the property for and what they sold it for, which gives you an idea of the gross yield that they’re getting out of the property.

Okay, so why does this matter? Home flipping trends help investors glean insights as to which markets have the most opportunity for gross yields. You can compare the potential for gross yields in that specific market on a year-over-year basis to determine upward or downward trend lines. This helps investors understand how that local market is positioned in the overall real estate cycle, and how much steam is left in that market cycle.

For example, 2016 represented a 10-year high. This could give some investors pause. However, a closer look at the data reveals that the rate of home flips in 2016 was still well below the number of home flips we saw back in 2004, 2005, and 2006. That tells us that we’re still in an up cycle (nationally), but we’re not in a frenzied cycle the way we were a decade ago. There’s still opportunity for investors looking to flip homes. When home flipping data begins to trend downward, investors should pause before moving forward with a fix-and-flip; a buy-and-hold strategy may be a better bet.

#2: Gross Yield Data

As we noted in #1, gross yield data can be valuable to both home flippers and buy-and-hold investors. Markets with rising gross yields indicate high demand for homes that are rehabbed and in good condition. This tells investors a few things about the market:

  1. Strong gross yields are indicative of a frothy market. If you’ve owned a property in that market for a long time, it might be a good time to liquidate.
  2. High gross yields indicate that a market has high demand, which could make it a good location for buy-and-hold investors.
  3. High gross yields can be a sign that a neighborhood is gentrifying. Whether you’re a flipper or a buy-and-hold investor, this could mean faster appreciation of homes in that area, in addition to increased cash flow if you decide to rent.

A caveat on gross yield analyses: investors should look at gross yield in terms of both the total dollar value (e.g. a $100,000 profit) as well as a percentage (e.g. a 15% return on investment). This will vary tremendously by market. For instance, a $100,000 return will look a lot different on an investment in San Francisco than it will in Pittsburgh. The same dollar amount will typically translate to a lower % return on investment in strong markets like San Francisco compared to emerging real estate markets like Pittsburgh.

#3: Sales Data

Most investors look at local comps before buying or selling a property. However, sales data is even more informative than most people realize. One of the first signs that a market is softening, for example, is that the number of sales is declining. Some would attribute this to a lack of inventory; but it could also be a sign of weakening demand. Sales data needs to be evaluated in terms of the volume of sales and sales prices. If the number of sales is declining, and home prices start to weaken a few months later, this is a red flag that the local market is softening.

#4: Foreclosure Reports

The real estate industry is particularly slow-moving. Unlike stocks or bonds, which can be traded in a single click, real estate is an illiquid asset. It takes time for properties to move. Within the industry, foreclosure data is particularly lagging. It can take months, even years, for a lender to initiate the foreclosure process. So while foreclosure reports can be informative, by the time this data becomes available, it might be too late for real estate investors to move on an opportunity.

With that caveat aside, let’s look at how foreclosure reports are helpful. When a market experiences an uptick in foreclosures, it’s a sign that the market has already experienced a downturn. Investors who want to catch early opportunities should monitor foreclosure data closely. When the number of sales increases, days on market increases, and prices decline, there’s a good chance that foreclosure activity will increase. Investors can often scoop up real estate at a fraction of the price when buying properties out of foreclosure.

This is just the tip of the iceberg. More data is available than ever before; it just takes time to sift through and make sense of it all.

The point here is that real estate goes through cycles. Investors who leverage real estate data sources can find good deals at any point of the market cycle. There are always deals to be had and money to make in real estate—you just need to know where we are in the cycle. Data and algorithms are critical tools that can be used to support your investment strategy.

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Amanda Maher

Amanda Maher is a self-proclaimed policy wonk who dabbles in real estate law. She holds a B.S. in Political Science and Sociology from Boston University, as well as a master's in Urban and Regional Policy from Northeastern.

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