New Index Could Make Rental Investments Safer

Single-family rental home demand is higher than it has been in a very long time. Investors want in, but the competition is very high. However, Roofstock has moved into the market and claimed they can gauge risk on a neighborhood level for investors.

Whether a larger company or a smaller investor, renting homes for strong returns is vital to your success. The rental market can be very risky, especially for beginners.

Companies are hoping to provide the help investors need when it comes to realizing returns on rental investments. Roofstock is one of those companies and believes it has a new way of looking at the single-family rental marketplace.

Neighborhood Rating Algorithm

Roofstock has introduced a new neighborhood rating algorithm using more than 72,000 Census tracks to figure out the real risk. This algorithm goes further than just the value of the home, the average rent and the income levels in the area. It uses dozens of factors to rate the neighborhood from one to five with one being the most risky.

Risk is only one part of the equation, however. Riskier neighborhoods may provide a higher shorter term return, but may also be harder to predict for the future.

RoofStock's Rating Scale

The scale includes one to five stars with five stars being the least risky. A five-star neighborhood will have the following:

  • Very high employment rates
  • Newer properties
  • Above average home values
  • Mostly owner-occupied
  • Above-average income levels
  • Above-average school district ratings

Comparing this to a very risky neighborhood or a one-star neighborhood shows the difference from one end of the scale to another. A one-star neighborhood will have the following:

  • Lowest employment rates in the area
  • Lowest income levels
  • Older Properties
  • Higher percentage of rental homes
  • Lower school district ratings
  • Lower overall home values

With the help of the Roofstock index, it's possible to get a better idea of the risk before investing. Many other companies have a similar type of system including TenX and HomeUnion, which both aim to help smaller investors when it comes to choosing the right properties.

Of course, assessing the risk is important and very helpful. However, it's not foolproof and it's only one part of the decision. The local market and the value of a property can change quickly and can be influenced by unexpected factors. Demand can also change due to construction and tenants are not always easy to predict. It's best to be informed before investing, and knowing the risk for a neighborhood is a great place to start.