You've probably heard the old real estate adage, "location, location, location," more times than you can count…
…But have you ever stopped to think about why it's such an essential rule of thumb?
If you're a real estate investor (or simply someone who's considering buying a property), understanding the importance of location is crucial. So, let's dive deep into this real estate mantra and explore how a location can make or break your investment dreams!
The Tale of Two Properties: A Location Love Story
Imagine two properties: Property A and Property B.
Both are charming, well-maintained homes with similar layouts, amenities, and pricing.
The only difference?
Property A is situated in a bustling, up-and-coming neighborhood, while Property B is located in a declining area with fewer job opportunities and a lower quality of life.
Property A becomes a hot commodity, while Property B struggles to find renters and a buyer.
This tale perfectly illustrates the importance of location in real estate. You see, the right location can turn an average property into a GOLD MINE, while a poor location can reduce a gem to a dud.
So… What Actually Makes a Great Location?
Now the question becomes… what factors contribute to a prime location?
Here are Ken’s 7 rules to follow for selecting where to buy:
- Growing Submarket: A thriving job market and a robust local economy are critical factors you must consider when deciding where to buy. In areas with job and population growth, you'll likely find demand exceeding supply for housing, which can lead to higher property values and rental rates.
- Safety and Low Crime Rates: No one wants to live in an unsafe neighborhood. A location with low crime rates and a strong sense of community safety is more likely to attract tenants and buyers, resulting in better returns on your investment.
- Diverse Demand Drivers: Choose locations with a diverse set of demand drivers that are not dependent on a single industry or government agency. Avoid areas with single-source employers, such as theme parks or military bases, to ensure that your tenants come from a variety of industries. This way, if one industry experiences a downturn, the effect on your investment is minimized.
- Landlord-Friendly State: Prioritize locations in landlord-friendly states, where laws and regulations are more favorable to property owners. States like California and New York can make it difficult for landlords to evict non-paying tenants, and rent control policies can limit your returns. That’s why I like Florida, where the legal environment is more accommodating to landlords and allows for us to enforce the leases.
- Median Income vs. Projected Rent: Look for areas where the median income is at least three times the projected rent within a one-mile radius of the property. This ensures that potential tenants can comfortably afford the rent, reducing the risk of vacancies and late payments.
- Home Prices vs. Rent Prices: Ensure that the homes in the immediate area are valued such that it's not cheaper to own a home than to rent an apartment. This is important because, if given the option, many people may prefer living in a single-family home over an apartment.
Don’t Buy Too Far Away: Time is money, so I choose a market that's close to home or easily accessible. For example, I prioritize direct flights and easy access between my two offices in Cleveland and Tampa. This helps me save time and stay actively involved in my investments.
Location Pitfalls: What to Avoid
Just as there are factors that make a location desirable, there are also MAJOR red flags to watch out for.
Here are a few location pitfalls that can hurt your investment potential:
- High Crime Rates: As mentioned earlier, safety is a top priority for most people. High crime rates can deter potential buyers and renters, resulting in lower property values and longer vacancy periods.
- Declining Economy: An area with high unemployment rates, struggling businesses, and a stagnant local economy can make it difficult to find tenants or sell a property. Keep an eye on economic trends to avoid investing in a sinking ship.
- Limited Demand Drivers: A location that relies heavily on one industry or employer poses a significant risk to your investment. If that industry or employer faces an economic downturn, layoffs, or closure, it can lead to high unemployment and reduced demand for housing. This, in turn, can result in lower property values, increased vacancies, and decreased rental rates.
Location, Location, Location: A Real Estate Success Story
Remember our earlier example of Property A and Property B?
Let's revisit that scenario and see how the importance of location played out in their investment outcomes.
Property A, situated in a thriving, up-and-coming neighborhood, experienced a surge in demand. As more people flocked to the area for job opportunities, the need for housing increased. As a result, Property A's value SKYROCKETED, providing its owner with a fantastic return on investment.
On the other hand, Property B, located in a declining area, struggled to find renters and a buyer. With fewer job opportunities and a lower quality of life, the demand for housing in the area decreased (womp, womp…)
Property B's value stagnated, and the owner had a tough time recouping their investment.
This story demonstrates the power of location in determining the fate of a real estate investment. The right location can make all the difference, turning a modest property into a high-performing asset.
Putting the Location Mantra into Practice
Now that you understand the importance of location, it's time to put this knowledge to work!
When you're scouting for your next real estate investment, remember to consider the following:
- Do your research: Investigate local economic trends, crime rates, school quality, and infrastructure before making a decision.
- Consider the long-term potential: Look for areas with promising growth prospects, not just locations that are popular today.
- Be open to new opportunities: Don't be afraid to explore emerging markets or neighborhoods that are in the path of growth.
By keeping the "location, location, location" mantra in mind, you'll be well on your way to making informed, strategic real estate investment decisions that have the potential for outstanding returns.
Happy multifamily investment property hunting!