Maximizing Investments: Harnessing Data-driven Real Estate Strategies

If you’re a seasoned real estate investor, you’ve probably used data analytics your entire career. Calculating cap rates, cash-on-cash returns or even putting together a standard comparative market analysis (CMA) are all forms of basic data analysis. And data-driven real estate strategies are more important than ever.

But as data analysis becomes more advanced, smart investors look for more creative ways to use analytics to supercharge their investment strategy. Every big industry player is already doing it, from the leading real estate investment trusts (REITs) to the websites offering real-time home values. So what are some unconventional ways that you can use data analysis to make smarter real estate investments?

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Look at nontraditional analytics

According to a report on real estate analytics from consultant firm McKinsey, 60% of the predictive power of real estate analytics comes from nontraditional variables. 

So while traditional real estate data strategies like analyzing vacancy rates, market performance and property features have significant predictive power when it comes to real estate investing, they collectively make up less than half of the total predictive power. 

So what are some of these nontraditional variables? The McKinsey report touched on data points like proximity to points of interest, such as the distance to a four-star hotel, and distribution of points of interest, such as the number of coffee shops in a 1-mile radius. 

The report also highlights metrics involving the number of swimming pool permits recently issued in the neighborhood, Yelp reviews for local businesses, the number and type of grocery stores in a 2-mile radius and a lot more. Again, when combined, these nontraditional data-driven real estate strategies were more predictive of an investment’s performance than conventional variables. 

So if you’re competing against other investors for a certain property, and you’re using both traditional and nontraditional variables in your analysis, while they’re only using traditional ones, they’re only getting half the picture. You have a huge edge.

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Trust the experts 

Using data-driven real estate strategies doesn’t mean you have to gather up the raw data yourself, build an algorithm to analyze it and put together a comprehensive investment spreadsheet. Smart people have been refining real estate data analytics for years — and smart investors are happy to piggyback on their expertise.

After all, every time you check a property’s value on Zillow or Trulia, you’re using their industry-best automated valuation models, and when you use an online commission calculator, you’re performing a kind of user-friendly data analysis.

To take things a step further, you could invest in real estate through a real estate investment trust or REIT.

REITs are modeled after mutual funds, except they invest in real estate instead of securities. Similar to mutual funds, their portfolio is heavily determined by the use of sophisticated data analytics. They own and operate income-producing properties, and are publicly traded just like stocks, so they’re an extremely liquid investment, unlike physical real estate.

Investing in a REIT is a way to tap into some high-quality market analysis, and get your money into the market — without all the hassle of actually buying and owning real estate.

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Don’t just look at upside

Most investors are optimists, but you should try to avoid tunnel vision when you delve into data-driven real estate strategies. Looking only for the upside can lead you to miss some important risk factors — an oversight that you might regret later. 

When you’re carrying out an analysis, dig beyond the headlines to find variables that might portend trouble. Are there unique local factors that can lead to unusual property declines? If the property’s value has been buoyed by local businesses, how are those businesses performing? If they’re not flourishing, your investment’s value might be a mirage. 

You might also want to reassess “safe” investments that are already in your portfolio. What does a comprehensive analysis say about those investments’ markets? You can save yourself a lot of money and stress by getting ahead of an expected decline.

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Finally, don’t assume that more is better, or that trends are linear — especially when it comes to nontraditional variables. Remember when we said the proximity of specialty grocery stores like Trader Joe’s can be a great predictor of rapid appreciation? That same study noted that this effect was limited, and that properties that were close to a high number of these establishments actually saw price declines. 

That’s why smart investors use analytics to predict risk as well as success. The more time you invest in researching your potential properties, the more informed and effective your decisions will be. 

Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times and more.