March Madness: The Sweet 16 of Real Estate Markets

Midway through March Madness Real Estate Forecasts the Winner

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 Xavier University in Ohio, with less than 5,000 undergraduate students, to the mammoth University of California in Los Angeles, with more than 30,000 undergraduates.

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.

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 can be a science.

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

Based on this methodology, the clear champion is Spokane County, Washington, home to Gonzaga University. A slightly higher than average unemployment rate of 7.1 percent didn’t slow down this team’s victory with a strong foreclosure discount rate of 27.6 percent coupled with a nice gross rent yield of 8.4 percent and finally a hefty average gross profit on flipping.  Spokane County wins thanks to an average gross profit return on property flips of $64,704 — compared to $47,657 for its opponent in the real estate investing championship game, Hamilton County, Ohio, home to the Xavier University.

In the Final Four, Xavier University’s Hamilton County, Ohio, beats out Monongalia County, West Virginia, home to West Virginia University, thanks to a high gross rent yield of 11.6 percent above Monongalia County’s 7.1 percent.  Meanwhile Spokane County, Washington, home of Gonzaga University, beats out Cleveland County, Oklahoma, home to Oklahoma University with a gross rent yield of 8.4 percent compared to 7.6 percent for the Sooners.

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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.

Sweet 16 bringing diverse real estate markets together

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 counties like Ingham County, Michigan — home to Michigan State University — that offer high returns on rental properties.

On the other end are high-priced markets like Los Angeles, 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 are over $100,000.

Methodology

For all the numbers below we used data from the county where each college is located.

Sweet 16: the unemployment rate comes from the Census Bureau as of November 2014.

Elite 8: to calculate the foreclosure discount we looked at the average sales price of a residential property in foreclosure or bank owned in 2014 compared to the average sales price of a residential property not in foreclosure or bank owned in 2014.

Final 4:  To calculate the annual gross rental yields we used the median sales price for December 2014 except in states where the sales prices is not required to be disclosed on the sales deeds. In those non-disclosure states we used the median list price for December 2014. The rental rates we used were the average fair market rent on three-bedroom home for 2015 from the U.S. Department of Housing and Urban Development.

Championship:  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 is defined as any property that was purchased and sold within a year window.

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