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Investment Property Location: Don’t Dismiss the #1 Rule in Real Estate

Filed Under : Real Estate by admin

Oct.27,2011

“Location, location, location!”

You understand the importance. It’s the number one rule in Real Estate.

Yet when it comes time to choose between a high cash flow property in a less desirable neighborhood versus one with a lower cash return but in a great location, you naturally start questioning the age old adage.

Why does location matter? To understand, you have to look beyond the initial numbers.

The Inherent Value of Location

While real estate values don’t fluctuate to the degree stocks do, its value still rises and drops in cycles. In up cycles, well located properties appreciate sooner, at a higher velocity, and maintain the momentum over a longer period of time. In down cycles, these same properties are also the last to take the hit. Because of their location, they tend to sustain their values. Alternatively, a property in a poor location will experience just the opposite. But what does this really mean to you, the investor?

Most investors buy and hold for the long term — the hope is that the property will appreciate to a point that reaches their target goal. Because real estate is illiquid in nature, when such a large sum of money is committed, you obviously want assurance that the investment will maintain its value over time. The desire is to cash in the chips and recoup your initial investment and profit some too.

Properties in poor locations experience the biggest swings in value over a longer period of time, and these investments typically become a race against time to recover fully before the next down cycle arrives. Properties in better locations, however, will have had a head start during the up-cycle in the race for appreciation.

While many investors intend to buy and hold for extended periods, oftentimes they are forced to prematurely sell their property. If you have a property in a desirable location, you reduce the risk of selling the property at a loss.

Cash Flow and Property Location

Investment property value is tied to its rental income. If rents increase, then appreciation occurs. As you guessed, rents are directly correlated to property value.

Let’s take the statement described in the previous section but replace “value” with “rents”:

In up cycles, well located properties have rents that rise sooner, at a higher velocity, and are maintained over a longer period of time.

Well located properties are typically located nearby employment centers: a particular area with a concentration of jobs. People first seek out locations that are close to employment centers; these areas are first to experience growth in rents. Properties in areas further away don’t experience the same rise in rents until renters are priced out and forced to look farther. If rents begin to decline, properties closest to the employment center have a better chance of sustaining their rent values. Following that logic, if your property is in a poorly located area when the economy sours, then not only have you lost substantial equity due to loss in value, but you’ll also experience less cash in your pocket each month. Your cash flow will continue to stay low until demand again spills over to your area.

Connecting the Dots

High cash flow properties are tempting because of their initial high return. However, keep in mind that if you’re holding for the long term, then know that a property’s value and cash flow will rise and fall. If the property cannot consistently sustain its high cash flow, its value will plunge too. In the end, your overall rate of return may end up being much lower than anticipated.

It’s easy to dismiss the location factor when staring at a property with a high cash return in a less than desirable area. However, numbers itself cannot explain the entire investment picture. While none of us can predict the future, what we can predict with certainty is that a good location will likely stay desirable for many years. While there are many unknown risks when evaluating potential of investment properties, choosing a favorable location will reduce their impact.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Investment Property Location: Don’t Dismiss the #1 Rule in Real Estate

Real Estate Investing For Real | A BiggerPockets Investment Property Blog

Tags : Dismiss, Don’t, Estate, Investment, Location, Property, Real, Rule

Property Location Quality Is THE Most Disrespected Fundamental

Filed Under : Real Estate by admin

Sep.13,2011

As long as I’ve been doin’ this, the one axiom virtually every real estate investor will echo as if his daddy said it first, is, everybody now, “Location, Location, Location!” Yet if we took a sneak peek at what many of ‘em own, it would be easily apparent that there was a slip between the axiom and the cup, so to speak. Granted, those who specialize in quick turns have, and no doubt will continue to do well in um, less than blue ribbon areas. Not all of them, but a sizable minority. I was one of ‘em. If you’re not the one stuck with the pig location, just the pretty girl profit, you’ve accomplished what you set out to do. I get it. And that’s not a backhanded shot at those who do well in poor areas. There’s a buyer for every property, right? You’re doin’ good things for that community.

But what about long term investments?

For a good part of my childhood I lived in a suburb of L.A. known as Norwalk. It was, at least back then, a mostly lower middle class place where salt of the earth types lived while they worked hard for a living. One of our neighbors had a rich uncle who used to visit them a few times a year. He lived on the west side of L.A., and owned ‘a company’. One time he showed up in a brand new 1962 Mercedes 300 SE. It was yellow with a carmel leather interior. Best of all? It was a convertible! Talk about gorgeous. I used to think he paid around $ 10,000 U.S. dollars for it, but have since learned he paid WAY more than that. No matter.

I remember how the fathers on our block said he’d wasted his money, how they cost so much to maintain, etc. About 20 years later I found myself in the area and drove by to see the old ‘hood. Wouldn’t ya know it, my neighbor with the rich uncle was still there! Guess what was in their garage?! Yep the 300 SE convertible. It looked like it was a few years old. Uncle had passed away the previous year, and left it to them. It had well over 250,000 miles on it, with its second valve job just a few thousand miles old. It ran like a top. I was jazzed. Their uncle had been right about buying quality at a higher cost.

Lesson learned

Even considering how much he’d paid for it new, there it was still goin’ strong — and reliable. He’d driven it for the rest of his life — 19 years. He’d saved big bucks by opting for big time quality. Am I suggesting you buy all your real estate investments in Beverly Hills? Of course not. But I am sayin’ there’s a priceless lesson to be gleaned by how insisting on blue ribbon quality of location for your long term real estate investments will act as guardians for your ultimate retirement income.

Keepin’ with the auto analogy, think about the now famous saying, “You can pay me now, or you can pay me later.”

Investors who allow themselves to believe comprising location quality for lower prices today won’t hurt them tomorrow, will not only pay later, but dearly. Do not accept less then the best when it comes to buying properties aimed at providing retirement income. The paying later part? It lasts the rest of your life.

Not a happy thought, is it?