Nothing But Net (Profits): The Sweetest Real Estate Markets Among the Sweet 16

Midway through March Madness it’s clear that parity reigns in college basketball.

The 16 teams that survived the manic first rounds of the NCAA men’s college basketball tournament are diverse both in geography, conference affiliation, and size — from the smaller private Dayton University in southwest Ohio, with 11,000 students and member of the Atlantic 10 conference, to the mammoth University of Florida in Gainesville, with nearly 50,000 students and member of the mighty SEC.

All these diverse schools have enough talent, athleticism and coaching acumen to win their next game, and maybe the next, and end up in the Final Four, where all bets are off. It’s so tough to predict the outcome of these matchups based on basketball factors alone that Warren Buffet offered a billion dollars to anyone who filled out a perfectly correct bracket prior to the tipoff of the tournament — and already all those brackets have been busted.

Brackets based on real estate
But if the brackets are filled out based on real estate investing metrics, the outcome of each matchup becomes much easier to predict. Real estate when done right, after all, is much more science than sport.

Starting with the existing Sweet 16, RealtyTrac has filled out the remaining bracket based on four key factors key to fundamentally sound real estate investing in the counties where the college towns are located. Those four factors are rental return, flipping profit, foreclosure discount and affordability. See methodology below for more details on each of these factors.

Based on this methodology, the clear champion is Ingham County, Mich., home to Michigan State University. A low median home price — including both distressed and non-distressed sales — of $82,750, combined with relatively high fair market rents on three-bedroom homes of more than $1,000 a month gives the county a gross rent yield of nearly 15 percent.

Ingham County’s high return on rental properties gives it an easy victory over its first opponent, Albemarle County, Va., home to the University of Virginia, with a gross rent yield of just 5.5 percent. Ingham County wins its second matchup thanks to an average gross profit return on property flips of 33 percent — compared to 14 percent for its opponent, Tolland County, Conn., home to the University of Connecticut.

In the Final Four Michigan State’s Ingham County beats out Alachua County, Fla., home to the University of Florida, thanks to availability of discounted distressed properties: properties in foreclosure sell an average of 58 percent below non-foreclosure properties in Ingham County compared to a 31 percent discount in Alachua County. And to claim the championship it beats out Knox County, Tenn., home to the University of Tennessee thanks to better affordability: median home prices in Ingham County are 1.90 times median household incomes compared to a ratio of 2.79 in Knox County.

College town investing primer
Housing markets in college towns, or at least the neighborhoods surrounding a university, tend to be favorable for real estate investing thanks to a steady stream of potential renters and a solid source of potential buyers with well-paying jobs.

“As the level of college enrollment has increased over the past several years within college and university campuses across Ohio, so has the demand and need for residential housing to service these consumers,” said Michael Mahon, executive vice president at HER Realtors, covering the Columbus, Cincinnati and Dayton, Ohio markets.  “Areas surrounding college and university campuses throughout Ohio are seeing renewed growth and development of new housing and commercial projects, as large institutional investors are joining with college administrators, to create effective community plans that provide entertainment, residential housing, parking and security for students, administrators and educators.”

With the opportunities, however, come some challenges that investors should be aware of before they jump into a college town market, according to Chad Ochsner, owner/broker of RE/MAX Alliance covering the Denver, Colo. market.

“Investing in a college town rental property is always going to be a great investment opportunity, but they can be particularly hard to come by for that very reason, especially in the Fort Collins and Boulder areas that are in high demand,” Ochsner said “When purchasing a rental property in a college town it’s important to check with the municipality regarding any restrictions they may have.  For example, in Fort Collins no more than three non-relatives can live together in one residence.  Investors should also expect a much higher level of maintenance on the property.”

Sweet 16 housing markets by the numbers
When it comes to real estate, the college towns represented by the Sweet 16 vary widely. On one end of the spectrum are the fundamentally sound, affordable cities like Dayton and Lansing, Mich. — home to Michigan State University — that offer high returns on rental properties.

On the other end are high-priced markets like Los Angeles, San Diego and Palo Alto, where median home prices are more than six times the median household income. Those high-flying markets come with some advantages, however: average gross profits on properties flipped in the three California markets is over $100,000.

Dashboard 1

Methodology
Just like good basketball teams, housing markets need to be well-rounded and have several ways of winning. So we picked four different metrics, one for each round from starting with the Sweet 16, to determine the winner of each round.

Sweet 16: Winner has highest return on rentals.
To calculate the highest rental returns we used the annual gross yield percentage, which is the annual gross rent generated by a property divided by the original purchase price. To determine annual gross rent we used 2014 Fair Market Rents for 3-bedroom homes from the U.S. Department of Housing and Urban Development. To determine the original purchase price we used the median price for a residential property in January 2014. . In two markets — McLennan County, Texas (home of Baylor University), and Tolland County, Conn., (home of the University of Connecticut), the median sales price was not available so we based the rental return on median list price instead.

Elite 8: Winner has biggest profit on property flips.
To calculate the highest gross profit we looked at the dollar amount difference between the original purchase price and the eventual sale price of single family residential properties flipped in 2013. A flip was defined as any property that was purchased and sold within a six-month window. In two markets — McLennan County, Texas (home of Baylor University), and Tolland County, Conn., (home of the University of Connecticut), the average gross flipping profit was not available so we used the statewide average.

Final 4: Winner has biggest foreclosure discount.
To calculate the foreclosure discount we looked at the median price of a residential property in foreclosure or bank owned in 2013 compared to the median price of a residential property not in foreclosure or bank owned in 2013.

Championship: Winner has most affordable home prices.
To calculate affordability we looked at the median price of a residential property in January 2014 and divided that by the projected median income for 2014 using historical median income data from the U.S. Census bureau.

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