At Rent RPM we understand that there is a lot that goes into the serious real estate investors’ decision to purchase and maintain a property for investment purposes. Numerous factors include the general growth of the housing market in the area, the appreciation of the property in the particular area, the employment rate, local amenities, and more. These factors are all important to the investor as a key indicator as to whether or not the property will be valuable and worth the investment, be it either to flip or to hold. With that in mind, this week in our blog we look at two of the most popular tools available for real estate development and investment.
The first internet available tool is www.zillow.com. According to the website Zillow uses a proprietary algorithm to determine the affordability of a property through the following:
To calculate an affordability index for a region, we first calculate the mortgage payment for the median house price in a metropolitan area by using the metro-level Zillow Home Value Index for a given quarter and the 30-year fixed mortgage rate during that time period, which is provided by the Freddie Mac Primary Mortgage Market Survey (based on a 20 percent down payment). Then we consider what portion of the monthly median household income goes toward this monthly mortgage payment. The affordability forecast is calculated similarly to the current affordability index but uses the one year Zillow Home Value Forecast instead of the Zillow Home Value Index and a specified interest rate in lieu of PMMS. It also assumes a 20 percent down payment.
The fraction of affordable homes in a zip code for a particular mortgage payment is calculated by first determining the largest possible mortgage (under the terms described above) that could be supported by that monthly payment. Affordable homes are those with a value less than this mortgage amount after accounting for a 20 percent down payment.
This is important information because it gives a base line starting point to determine rent and other factors concerning the property in which they invest. All in all, Zillow is a great tool available for serious investors, and home buyers, who are looking into local properties and trying to determine if the price equals the risk.
The next tool is an app available on the iTunes store and is designed and marketed toward a more inclusive group of developers and investors, known as Zonda . Zonda is a professional tool developed to give real estate investors and property developers all of the information needed to determine the best places to build and invest in property. The Zonda algorithm, according to the President of Meyers Research – the developer of the app, “We’ve taken every variable that impacts housing, as more of a business-to-business tool, so it’s much more sophisticated. There really isn’t an analytic tool of this level for the home building industry.” In short, Zonda uses job growth, school rankings, building permits, and more to determine which areas rank highly for real estate speculation and development.
Both of these tools are important for the real estate investor and the home buyer. It provides information regarding the current state of the real estate market as well as gives metrics to determine future value of properties.