Neighborhood ratings can be tricky. Can you reduce a neighborhood to a number? To what extent is quality of life subjective?
Roofstock, a website that lets investors find and purchase tenant-occupied single-family rental homes online, has taken a focused approach to the undertaking: It’s scoring neighborhoods based on their estimated risk level for real estate investors.
The Roofstock Neighborhood Rating assigns a score ranging from one through five to neighborhoods based criteria such as home values and educational attainment. Five denotes the lowest level of risk for single-family rental investors, while one denotes the highest.
The scores are designed to allow investors to make side-by-side comparisons between single-family rentals to identify opportunities that align with their risk tolerance.
Investors who visit Roofstock to shop for single-family rentals can view the scores on listings, along with information including current rent, estimated gross yield, estimated appreciation and a home inspection.
Rather than applying to ZIP codes or cities, the scores are assigned to census tracts — which typically cover around 1,500 homes, “providing investors with an added layer of localized insight when measuring the risk vs. reward trade-off,” Roofstock said in a press release.
Scores are based on dozens of factors, including home values, income levels, employment rates, educational rates, educational attainment, percent of owner-occupied homes and school district ratings.
Neighborhoods with a five-star rating would boast very high employment and above-average income levels and school ratings, along with relatively expensive homes that are mostly owner-occupied.
The takeaway is intuitive: Basically, the more affluent an area is, the less risky it is to invest there.
But the ratings won’t necessarily encourage investors to pour cash into Beverly Hills and Greenwich.
Low risk usually means low returns. Many investors are looking for a sweet spot and are willing take on significant risk for the potential to generate high returns.
Communities with two, three and four ratings may appeal more to many investors than their top-rated rated counterparts.
Other sites that provide neighborhood ratings include Niche, whose grades center around quality-of-life measures, and NeighborhoodScout, which provides investment opportunity and security ratings.
Some fair housing advocates worry that mixing ratings into property search tools can have an adverse impact on communities with high concentrations of minorities. This may be part of why Zillow Group and realtor.com recently wiped traffic-light color coding from their school ratings.
