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Why Location Matters in Real Estate Investing

DFY Real Estate

“Location, location, location.” This is often cited as the number one rule of real estate. But does it still apply when purchasing an investment property instead of a personal residence? And what the heck does it really mean, anyway? We will dig into why location is the criterion that trumps all others when searching for investment properties.

What does it mean?

When people talk about “location, location, location,” they mean that identical houses in different locations can be worth drastically different amounts today and grow at dramatically different rates in the future. A neighborhood that has seen tremendous growth and improvement in the last decade may have less potential for increase than one that is just starting to become popular. This makes the location a key consideration for anyone shopping or real estate, but especially for investors. Here are some of the location-specific factors to consider when evaluating a potential rental property:

Employment Proximity

You don’t care about the distance of the commute to your specific workplace because you aren’t going to live in this home. You may not even live or work anywhere near this property. But you want to consider proximity to major work concentration centers, as that opens up your renter pool. Suppose there’s only one moderate-size employer nearby. In that case, attracting tenants may be more challenging than if your investment property is situated for an easy commute to many major companies. That means lower rents and lower profits.

Resources

A home in a charming, walkable part of town filled with popular, independently owned shops and restaurants sounds lovely to many people. That means it will fetch a premium as a rental, but you will also pay a similar premium when you buy it. You’ll need to explore the balance. Sometimes, paying more nets you more, and other times you don’t see a proportional return on the additional investment.

Often, it can be best to thread the needle on resources by finding an area that currently doesn’t have many desirable resources but is attracting more and more options. These neighborhoods on the cusp of exploding into the next “It” spot offer tremendous investment potential. You aren’t yet paying a huge premium to buy them. In a few years, when the neighborhoods around them are full of resources that make them the place everyone wants to be, your rental rates can skyrocket.

This principle is also true for areas where public transportation is being built but not yet open or locations with significant developments like professional sports arenas or Fortune 500 companies planning future expansion projects. A home in one of those areas is likely to increase in value more quickly than a similar property in a suburb that remains mostly unchanged in the same period.

Schools

The quality of schools can be dramatically different between districts, even those adjacent to one another. In some cases, the difference of one street over or even the opposite side of the same street can mean a different school and, with that, a very different value. Many parents will pay a premium for a home zoned for the area’s top schools, which means you can charge more rent. It also means you will pay more for the purchase.

Homes in great school districts tend to increase more quickly in value, so you may decide that that extra initial cost is well worth it. You may also find that being able to list a highly sought-after school in the rental advertisement helps you fill your rental quickly and with highly qualified tenants.

How to Buy in Areas You Aren’t Familiar With

When buying a residence for yourself, you are limited by where you work, proximity to family, or other location-based factors. For an investment property, none of that matters. You can live, work, and have a family in Mississippi but own one rental property in Utah and another in Idaho. That means you can go where the deals are, which is fantastic, but it also means you have more to choose from, which can be overwhelming.

How do you know whether there are properties with great deals in Utah? Or whether the attractive internet property listing in Idaho is in a safe neighborhood that will attract stable tenants and garner high rents?

This is where real estate investment firms can assist you. It’s their job to be familiar with real estate markets nationwide. They can track deals and find properties with excellent cash flow potential, no matter where those homes are located. You don’t need to become an expert in Salt Lake City rental rates or Coeur d’Alene subdivisions. All the research is done for you.

Just because the house you buy isn’t a home for you doesn’t mean you can disregard location. Your cash flow and equity growth depend on making wise choices about the location of your investment property. A beautiful home in an area no one wants to live in isn’t going to bring you the income you desire. Evaluate the above factors and ask yourself whether any potential location will likely attract solid tenants or experience a property boom. As long as you pay attention to “location, location, location,” you will see money, money, money.


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