Using data to find cities with property flipping potential

It is no doubt that many investors view 2020 as a challenging year. A year that has left us confused, aspiring to find an asset class with exceptional long-term returns. With bond yields at all-time lows and the stock market valuations are off to the moon, the printed money (stimulus checks and CARE Act loans) has to find a haven to settle, which will most probably not be in checking accounts.

According to Morningstar’s article rb.gy/ihjhnt written by John Rekenthaler, long-term stock returns will be around 5.5%. The calculation takes into account the ten year GDP expected growth, dividend yields, and expected inflation. Accordingly, it would take 18 years to double your money, which we find quite unattractive. Grounding the point that yield starvation is a problem, we suppose that investors will naturally flock to riskier assets, which brings us to write on Real Estate Rehabs in this study.

The purpose of this article will be to introduce you to a clever way to recognize towns in New Jersey with property flipping potential. We will start by extracting real estate property data using the Realtor API in python, download the data into an excel spreadsheet, and finally use box plots and regression models to find compelling insights. We will concentrate our efforts on Asbury Park and Oakland (Both in New Jersey), where we will examine the price differentials between renovated and non-renovated properties.

Finding #1 — Asbury Park offers excellent potential for Real Estate Rehabbers

Controlling for home square footage and the number of bedrooms, we find that a large gap exists ($150,000) between the median home price of a renovated vs. non-renovated property in Asbury Park. The box plot below with 91 properties explains the relationship:

To endorse our findings and warrant that no other factors contribute to this differential, we used a multiple regression model to determine the extent of the renovation impact and the 95% confidence intervals.

We found that renovating a property in Asbury park can add anywhere between $54,000 to $216,000 to your property’s selling price (P<5%). The range depends on factors not explained by the data obtained in our model; however, we can assume that the renovation’s quality explains the variance. Moving on, we decided to look at the Oakland property market to experiment if the same differential exists in a non-vacation town.

Finding #2 — Oakland residents don’t value renovations, but a bathroom and a pool will do it

The box plot for Oakland is different from Asbury Park. The median price gap is not as wide, leaving you (the investor) with a packed room to add value. Using regression, we found that Oakland residents will pay between $50,000 to $115,000 for an additional bathroom and $162,000 to $176,000 for a swimming pool. Now, if you choose to build an extra bathroom, which on average can cost you around $25,000 according to data from “The powder room guys,” you will yield a 2x return on your investment (assuming you sell it for $50K as proposed by the regression model).

Conclusion

We believe that private investments in real estate or private businesses will offer superior long-term returns. There are many ways to get into real estate, either passively or not, but the future will be risk-taking. Long gone are the days where passive investments doubled your money in 10 years.

In this article, we explored how you can use data to your benefit to hedge against risk. We hope it was insightful and that you enjoyed the reading. I encourage you to post any comments and to give me a “Clap” if you enjoyed this reading.

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Hussein Ahmed

Hussein Ahmed

Product Management — Machine Learning — Finance