As a real estate investor, you need to choose the best place to invest in real estate and the best investment properties. When trying to determine which area to buy an investment property in, you look for one with the best investment performance and the best potential returns. This can be done through neighborhood analysis. While the process of conducting a neighborhood analysis may take several weeks to complete, there is a tool that can do it in a matter of minutes. This tool is known as a real estate heat map.
What Is a Real Estate Heat Map?
A real estate heat map is a real estate investment analysis tool that uses visual cues in addition to numerical data to distinguish different locations based on performance. Mashvisor’s heat map tool uses different colors to represent different percentages or ranges of important real estate metrics. Using a heat map analysis tool to search for a neighborhood with investment properties for sale that promise good returns makes the process much easier and faster. It eliminates the messy use of various sources and spreadsheets for analyzing real estate investments.
How Does a Real Estate Heat Map Work?
A real estate heat map works in a very simple way using predictive analytics and property data. After activating the real estate heat map, it will show how different areas are performing on average using different colors (green, yellow, and red) in varying shades. The colors will show whether the numbers of the selected metric are low (red) or high (green).
You can filter your search using a number of metrics, which will depend on the real estate heat map tool you are using. Mashvisor’s heat map tool allows property investors to perform real estate analysis of a location to identify areas with the most affordable listing prices and the highest rental income, cash on cash return, and Airbnb occupancy rate. Let us look at the metrics used in Mashvisor’s heat map tool.
1. Listing Price
The first question that usually comes to a real estate investor’s mind is, “How much will it cost me to buy an investment property?” When using a real estate heat map, the first step will be to identify if the area is affordable for you. After all, even if the area is performing very well but your budget is below the listing prices, you will not be able to invest in that location. Therefore, when using Mashvisor’s real estate heat map tool, you will begin by choosing a city and activating the listing price as the filter.
Once the listing price filter is active, you will focus on the areas on the map that are marked in red. The red color represents areas with the lowest listing prices. It is also possible for you to see the range of the listing prices for the whole market (minimum price – maximum price). This will give you a rough idea of what the colors reflect in terms of real estate prices. Therefore, the real estate heat map will tell you which neighborhoods in that particular city have investment properties in your price range. For instance, if you intend to invest in cheap rental properties, focus on the areas marked in red.
2. Cash on Cash Return
After finding an affordable area, you can now switch to another filter so as to know more about the investment viability of the area. Using Mashvisor’s heat map tool, you can set the filter to the Airbnb Cash on Cash Return metric or the Traditional Cash on Cash Return metric. Each of these metrics will show you the average cash on cash return for that particular area and for the respective rental strategy selected. By using a real estate heat map tool to find cash on cash return, you can determine which rental strategy has a higher potential for profits.
Once you settle on the rental strategy, you will have to figure out what a good cash on cash return is. You want to aim for neighborhoods with high cash on cash return which will be displayed in green. Keep in mind, however, that the cash on cash return shows the return on investment of an income property based on the amount of money that is put into it. So while you can choose a neighborhood with high cash on cash return, you will have to continue with an in-depth investment property analysis to determine how your unique financing will affect the cash on cash return of the specific income property.
Related: What Is a Good Cash on Cash Return?
3. Rental Income
Rental income is essentially the real estate investor’s salary and very important in real estate investing. The real estate heat map can also be used to show the rental income that can be produced by each rental strategy (Airbnb or Traditional). By filtering using Airbnb rental income and Traditional rental income, you will be able to see which rental strategy has better potential rental income in each neighborhood.
4. Airbnb Occupancy Rate
The last filter you can check out using a real estate heat map tool is the average Airbnb occupancy rate for short-term rentals in the area. Just as vacancy rates are important when investing in long-term rentals, Airbnb vacancy rate is critical when investing in short-term rentals.
The Bottom Line
The real estate heat map tool is a very important tool in real estate investing. It will provide you with insights on the local market in each neighborhood, such as the average real estate prices, the average cash on cash return, average rental rates, and Airbnb occupancy rates. A real estate investor can adjust his/her search results to filter out any neighborhoods with investment properties for sale that don’t meet the search criteria.
It is a simple and fast way to find money-making areas in a real estate market. This real estate investment tool can save you many hours of real estate market analysis.