Using a heat map tool when searching for investment properties can make the process much faster and easier.
As a real estate investor, when you want to research a certain market to determine the areas with the highest potential for profits, you will find that there aren’t that many tools that you can use to make the process easier.
However, by using a heat map tool, it is possible to analyze a market in a short amount of time, determine the best areas for investing in that market, and eventually find the perfect property in any neighborhood that you want to invest in.
In this article, I will be talking about using a heat map tool for analyzing a real estate market and identifying the best rental properties for investing in the least amount of time.
What Is a Heat Map Tool?
A heat map is a tool that is used in search platforms to distinguish the different areas on a map based on their performance.
The way a heat map works is very simple: when you activate the heat map, a colored layer will appear on the map to tell you how each area is performing on average.
The colors used by a heat map tool are green, yellow, and red in varying shades. Depending on the color, you can tell whether an area’s numbers for the selected metric are high (red) or low (green).
Depending on the heat map tool that you’re using, there will be a number of metrics to choose from. Here, I will be using Mashvisor’s heat map tool as an example. The filters that you will find on Mashvisor when using a heat map tool are:
- Listing Price
- Airbnb Cash on Cash Return
- Traditional Cash on Cash Return
- Airbnb Rental Income
- Traditional Rental Income
- Airbnb Occupancy Rate
By using these filters, you can analyze a market based on these metrics and how each area within that market is performing on average for these metrics.
Now, let’s talk about the process of using a heat map tool for analyzing a market.
Using a Heat Map Tool – Step 1
The first step that you want to do when using a heat map tool is to identify the areas where you can afford to purchase a property.
After all, no matter how well an area is performing, if the listing prices are above your available budget then you won’t be able to invest in that area.
So, when using Mashvisor’s heat map tool, you will want to start off by activating the listing price filter.
Once you have it active, you will want to focus on the areas that are marked green. These areas will have the lowest listing prices. You will also be able to see what the range of prices is for that entire market (min-max prices), which will give you an idea of what to expect from the colors and the prices that they reflect.
As you can see in the image, the area of East Garfield Park is marked orange, meaning that the average listing price there is slightly above the overall for that market, but it is affordable with a median price of $199,000.
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Using a Heat Map Tool – Step 2
Once you’ve identified an area with an affordable price, it’s time to switch to another filter that can tell you more about the investment opportunity in that area.
Using the heat map tool at Mashvisor, you can set the filter to the Airbnb or Traditional Cash on Cash Return metric.
Each metric will tell you what the average cash on cash return is for that area and for the respective rental strategy that you have chosen.
By using a heat map tool for this step, I was able to determine that the East Garfield Park area has a much higher potential for profits when using the Airbnb rental strategy, while the traditional cash on cash return for the area was below average.
As you can see in this image, when using the Airbnb Cash on Cash Return filter, the area turns green, meaning that the cash on cash return is highest for Airbnb rentals in that area.
On the other hand, when using the Traditional Cash on Cash Return filter, the shade of green is much lighter, which means that the average cash on cash return is higher than the entire market’s average but still lower than it was for Airbnb rentals.
Using a Heat Map Tool – Step 3
Since it’s still difficult to decide on the better rental strategy to use, let’s see what the heat map will tell us about the rental income that each strategy will produce.
By using the Airbnb and Traditional Rental Income filter, you will be able to see what the rental income is in East Garfield Park for both rental strategies.
As you can see, the Airbnb Rental Income is also well above the market’s average, so the area is marked green.
However, when switching to the Traditional Rental Income filter, you can see that the value decreases significantly, and East Garfield Park becomes marked red, which means it’s well below the market’s average.
Using a Heat Map Tool – Step 4
Now that you’ve determined that Airbnb rentals generally have a higher performance in East Garfield Park, there’s one last filter to check out when using a heat map tool.
The Airbnb Occupancy Rate filter allows you to see what the average occupancy rate is for short-term rentals in that area.
As you can see in the image, the occupancy rate in East Garfield Park isn’t optimal. However, this only means that you have the potential to manage the property correctly and increase its occupancy rate. But even if the occupancy rate remains as it is, we already know that the cash on cash return that the property is projected to have makes it a profitable investment.
As you might’ve noticed, using a heat map tool can save you countless hours when doing a market analysis to identify the best areas for investing in that market.
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If you’re looking for the best platform for using a heat map tool, make sure to check out Mashvisor’s platform as it includes a ton of other features and tools that can make the process of investing in real estate much easier and faster than ever before.