How do you grade a neighborhood?

Question

I’ve been looking into out of state markets to invest in because it is harder to find deals in my market (Atl, GA). One thing I am having a hard time figuring out is, how to rate a neighborhood that’s out of state. I see turnkey companies rating neighborhoods that have 2 and 1 school rankings as B locations. This seems very generous to me.

How do you, as an investor rate the neighborhoods you invest in?

John K. · Answer

I grade a neighborhood based on specific data, that helps me paint a picture. I operate in multiple cities for multiple clients, and none of them have the exact same requirements or expectations. This means I have to learn a city, quickly. I can't just drive that city and become an expert in it, I have to rely on a ton of data.

Income: I look for income that is 2-2.5x the current federal poverty level, which is roughly 22K for a family of 3. I do this, because if the median income by zip code is 45K, then I know that there are more than enough people in that zip code, that can meet the 3x rent requirement.

If my clients are more interested in owner financing properties, I tend to look for those zip codes that are closer to the 2.5x, rather than the low side.

Percentage of Renters: For my clients that are interested in renting, I want to see as high as percentage of renters, as possible. I like to see 50% or more. I just reverse this for those clients that are interested in owner financed homes.

Population:  I am only interested in cities that have a population of 100K or more, this indicates that there are JOBS! I am fortunate that in Texas, there are 36 cities that have at least 100K residents, but not more than 1m. This gives my clients a lot of flexibility. This also allows me to put my clients in a much better cash flow position, by offering a different option, to the "big" cities.

Neighborhood: When I drive the area, I look for the majority. Do I see a majority of homes being kept up in an acceptable manner, or do I see the opposite? I want to see that the people that live there, care. This gives me instant insight into those folks. If I see a few houses that are beaten up or boarded up, I have no issue with it. If it bothers me too much, I will buy it and fix the problem.

Crime Stats: If it's an area that has a high number of violent type crimes, I just move on. However, there is crime everywhere these days, even in those neighborhoods that many feel are "good". I look at trends to see if there is growth/decline in the crime, this suggests that the neighborhood might be transitioning.

When it comes to actually giving a grade on it, as already stated, that is 100% subjective. I use the data above to put a "grade" on it.

Joe Villeneuve · Answer

ARV for common properties - Total Cost for same property type = Potential Profit for that property group.  If the Potential Profit >= your minimum needed Profit, buy there to flip.

Area Rent - Expenses = Potential Cash Flow.  If the Potential Cash Flow >= your needed minimum CF, buy those properties to Hold.

Ike Stephens · Answer

How many markets are you looking in? To me it makes the most sense to pick a single market, become extremely knowledgable in that market and acquire a handful of properties before investing in others. Once you've found a market that fits your criteria start doing a lot of research online (there's a lot you can learn if you have the time) and once you have a general idea of the good, bad and the ugly, take a trip out there to drive around and confirm what your prior research has shown. You can rank the neighborhoods for yourself and reference that any time a deal comes across your desk and know pretty quickly what general class of neighborhood it's in. Ike

Robert Matelski · Answer

I think using a combination of census data (down to the census tract level, which is often just a single neighborhood or a portion thereof) and school rankings makes the most sense. Within a market, the average or median values constitute a C or maybe a low B. Somewhat higher than the median value for each parameter leads me to call it a high B or low A... and way higher leads me to call it a high A. A little worse than the median value and I call it a low C... way lower than the median and it gets into D and F territory. I do this for a number of data points... the data sets I find most relevant are home ownership %, median household income, % of people w/ at least a HS diploma, % of people w/ at least a bachelors degree, % of vacant housing units, and school data from some independent rating site (I personally look at niche a lot). So to create the "grade" you might weight each of the data points the same (think of it like calculating a grade point average, assuming you are taking 5 classes each worth an equal amount of credit... or weight them differently if you feel strongly that one data set is more important than others).

Here is a good census site to use to get started: https://www.census.gov/censusexplorer/censusexplorer.html

James Wise · Answer

I graded the neighborhoods in the Cleveland market in The Ultimate Guide to Grading Cleveland Neighborhoods. Take a look there as I broke down why I gave each neighborhood the grade I did. Note I am currently in production on a similar guide for Birmingham, Alabama & Memphis Tennessee.

Scott Kaczmarek · Answer

@Brett Veasey - you really need to fly out there and see the neighborhoods.  I do that before investing in any out of state market and I rate them myself:  A= I’d live there;  B= I’d live there if I had to; C= I can walk through there (without my wife) and everything else is a no-go.  It’s subjective, but in the end so are everyone’s rating system!

Tim Harwick · Answer

Good question. Anyone know if there are standardized grading systems out there? Seems like everyone's got their own personal grading system which is pretty subjective. I like @Scott Kaczmarek's rating system, but I just can't fly out to every place I want to buy.

Dean Letfus · Answer

Depends on what you're looking for Brett. In terms of quality of area most people rate them A to C or A to D.  The more crime, the lower the rents and the more board ups, the lower the rating generally speaking.  And some markets, like mine in Memphis, you cna't rate an area, you have to rate them block by block, street by street.

How do you grade a neighborhood?

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