Location Matters

For real estate investors, location can be the overriding factor for an investment decision. Investors will work diligently to secure a property that corresponds to their specific location needs. Thus, investors should carefully consider various factors related to location when assessing a prospective investment. But, why is where so important for real estate investors?

Big city investments

First, investors must determine the size of market they are seeking for an investment. Do investors desire properties in only large, gateway cities, or do they seek investments in smaller, possibly overlooked markets?

Large cities may offer greater economic diversity and stability. This is because firms in such markets are surrounded by other firms—creating both healthy competition for workers and symbiotic support for one another. An investment property in such a market may command higher rents and terms more favorable to the landlord. Investment opportunities that are presented in central business districts are often priciest among investment opportunities, but they historically have commanded the most upside with nearby firms, amenities, and transportation options. There is a reason the American downtown continues to thrive even into the 21st century. 

Secondary Markets

Not every investor possesses the capital to add properties in large or niche markets to their portfolios. Thus, some investors actively seek investments in secondary and tertiary markets. Investing in real estate that is further away from large markets and central business districts can also be profitable, and more manageable, for new investors. Local amenities exist in these smaller markets like restaurants, shopping centers, small firms, schools, entertainment, popular roads and maybe even surrounding neighborhoods. 

Future development potential in these areas can further make such investments attractive to investors of all types. Tara Struyk, vice president of content at Investopedia observed, “It is not just the present amenities that matter, but future ones as well. Plans for new schools, hospitals, public transportation, and other civic infrastructure can dramatically improve property values in the area.” If investing in real estate in these areas is something investors want to do, then looking toward the future and what will surround the subject property will only make investments more attractive.

Niche Markets

Another consideration is the type of community or economic base of the subject property. For instance, see the earlier Sago blog article, “Industrial Real Estate Hot Spot,” addressing the appeal of industrial real estate in port cities.

While these specialty cities or “company towns” (i.e., industry specific or geographically unique markets) may be more subject to economic turmoil, they are often attractive and commanding industry leading rents and terms for landlords. They can present unique financial rewards for investors willing to do more homework and take risks.

Importance of location in identifying investments

Investors look for a location that will best suit their needs and/or offer them the greatest ROI. Assessing commercial growth in the subject area is a huge proponent to these investment decisions according to Dave Seymour, CEO of Freedom Venture Investments.

“Commercial growth for an area can be assessed based on factors, such as taxes, energy, and credit-costs. These factors determine a business’s ease setting up operations or expanding in particular areas,” he said. 

Seymour goes on to mention capitalization as a major factor in investment decisions. “To determine business prospects, financial specialists focus on determining capitalization rates within the first year of investment. The capitalization rate (or cap rate) is referred to as the amount of time required to be able to see a gain in your investments. This does not come easy and cannot be determined simply by adding in monthly rent for commercial and housing properties.” 

Conclusion

Investing in real estate can be a very difficult decision that requires a great deal of thought and planning for investors or firms.  Investors understandably want the greatest return on their investment. Location and its related factors are driving forces for investment decisions, and location ultimately can make or break an investment opportunity. Thus, investors should pay careful attention to all location factors when evaluating real estate investments. 

Submitted by Matt Schaub.