How Important Is Location to Real Estate Investments?

Location is one of the most critical factors in determining the success of a real estate investment. The old adage in real estate is “location, location, location” for good reason. Where a property is located impacts its desirability, functionality, appreciation potential, cash flow, and almost every other aspect of owning and operating an investment property.

When evaluating potential real estate investments, properly assessing the location is essential. Not all locations are created equal in terms of investment prospects. Understanding the nuances of different neighborhoods, cities, and regions can make the difference between a property that provides excellent returns and one that underperforms the broader market.

This article provides a comprehensive overview of how location impacts all types of real estate investments. It offers practical tips for researching and evaluating locations as well as real-world examples of how location has affected investment outcomes.

How Location Impacts Property Values and Appreciation

One of the main goals of most real estate investors is to generate appreciation on their investment over time. The location of a property has a direct correlation to its ability to appreciate in value. High-demand locations tend to see stronger home price and rental appreciation over the long run.

Several factors related to location influence appreciation potential:

Job and population growth: Areas with a strong labor market and growing population tend to see higher housing demand and prices. Robust job growth leads to more people moving to the area, pushing up home values.
Access to amenities: Properties located closer to amenities like good schools, parks, entertainment, restaurants, and other conveniences are more desirable. People are willing to pay a premium to live near places they visit frequently.
Supply constraints: Locations where geographic or regulatory factors limit housing supply can mean higher prices due to excess buyer competition. Coastal cities limited by water or towns with strict zoning rules preventing overdevelopment often experience higher appreciation.
Affluence: In general, more affluent neighborhoods see stronger demand and price gains over time than lower-income locations. There are exceptions, but most high-end purchasers prefer upscale communities.

When evaluating appreciation potential, investors carefully consider the specific location’s growth dynamics. While past performance does not guarantee future results, understanding demographic and economic trends in the area is key. Locations creating an undersupply of housing amid growing populations offer some of the best prospects.

Location Impacts Cash Flow Analysis

A property’s location also affects rental income and expenses, playing a major role in cash flow analysis. The optimal location for cash flow maximization differs from that of appreciation optimization.

Factors impacting cash flow include:

Rental rates: The rental rates a location can command influence income potential. Areas with higher rents relative to property values tend to have better cap rates.
Tenant pool: Some locations have a large pool of reliable, stable tenants, while others pose greater turnover or vacancy risks.
Expenses: Factors like property taxes, insurance premiums, and maintenance and turnover costs vary significantly between locations. Landlord-friendly areas offer better expense efficiency.
Competition: Highly saturated markets compete for tenants, pushing down rental rates. Less competitive markets allow landlords to better optimize rental incomes.

Investors may prioritize lower property costs and higher rents over appreciation potential for cash flowing rentals. College towns, blue-collar communities, and up-and-coming neighborhoods can provide inexpensive properties with plenty of tenant demand.

Critical Factors by Property Type

While location is important for all properties, the specific attributes impacting performance differs across property types:

Residential Rentals

Proximity to major employers
Quality school district rankings
Low crime rates
Access to retail, dining, and recreation
Low property taxes and landlord regulations
Strong tenant rental demand and low vacancy risk

Commercial Real Estate

Traffic counts and visibility
Accessibility to major thoroughfares and transportation
Area median income levels (retail/restaurants)
Daytime worker population stats (office)
Business climate and demand drivers

Raw Land

Development potential and zoning designation
Nearby comparable land values
Likelihood of property improvements coming to area
Population growth patterns

REITs

Economic health of cities where properties are located
Multiple factors like those above weighted across entire portfolio

As the examples illustrate, investors evaluate the metrics most relevant to each property type when assessing locations.

Researching an Area’s Investment Potential

Conducting thorough location research is crucial to understanding its investment prospects. Here are helpful tips for analyzing a potential area:

Study city development plans: See planned infrastructure improvements and development projects that can impact future growth.
Review multiple listing services: Analyze sales trends for pricing and demand dynamics across property types.
Consult proprietary real estate data platforms: In-depth location analytics provide decision-making insights for investors and developers.
Evaluate demographic and employment statistics: Growing populations with increasing incomes signal strong housing demand potential.
Conduct on-the-ground observations: Physically observing economic activity, talking to locals, and verifying data provides real-time intelligence.
Connect with knowledgeable local experts: Experienced real estate investors, developers, and brokers in the area often provide valuable market intel and observations.

Utilizing a mix of data sources, statistical indicators, and qualitative insights provides a reliable overview of an area’s investment prospects. Identifying the next up-and-coming location before it becomes widely known can lead to outsized returns.

Case Studies Demonstrating the Importance of Location

While properly assessing real figures and growth trends is essential, real-world examples also best showcase location’s importance:

Failed Luxury Development in Buckhead, Atlanta

A few years ago, a luxury condo project broke ground in Atlanta near the prestigious Buckhead neighborhood. The 100-unit development appeared well-positioned to capitalize on Buckhead’s affluent demographic drawn to the high-end restaurants, shopping, nightlife, and country clubs.

However, the project site was just outside the core of Buckhead proper in an adjacent neighborhood known as Lindbergh. When the development opened in 2008 after the financial crisis, weaker than expected sales lead to discounts and incentives for buyers.

By 2015 nearly a quarter of the units remained unsold as the location just outside Buckhead deterred the prime target purchaser demographic. Eventually, the lingering inventory got sold off at lower prices to investors and end-users.

The project likely would have performed significantly better located a few blocks closer directly within the core Buckhead neighborhood.

Failed Retail Center Next to Affluent Community

A similar instance highlighting the perils of location occurred with a retail center constructed adjacent to a highly affluent master-planned golf community. The 300K square-foot outdoor retail project lined up commitments from upscale restaurants, shops, grocers, and other tenants banking on wealthy residents nearby.

Unfortunately, directly adjoining community access was blocked by the layout resulting in indirect access. Well-heeled prospective shoppers did not have the high visibility and convenience to attract consistent business. The center never thrived leading to disappointed investors and stakeholders.

Meanwhile, mixed-use projects developed directly inside the affluent community thrived given the built-in wealthy customer base within walking distance.

Massive Home Price Gains Near New Facebook Campus

Contrast those two examples with the neighborhoods surrounding Facebook’s new campus development in Menlo Park, CA demonstrating the potential upside.

In 2011 when Facebook announced plans to relocate their headquarters to Menlo Park, directly adjacent neighborhoods consisted primarily of middle-class 1950s ranch homes. Demand sent housing prices soaring over the next decade as tech workers flooded the area around the booming social media giant.

Investors fix-and-flipping properties in the area have generated massive windfalls thanks to proximity to Facebook’s headquarters. Homes purchased for $1-2 million appreciated to over $3-4 million in some cases – representing incredible unrealized gains.

The nearby neighborhoods flourished thanks to their fortunate placement close to a major economic anchor driving exceptional returns.

Key Location Factors by Country

Location factors impacting real estate investments also vary significantly across different countries and regions worldwide.

United States

In the U.S., critical location factors revolve heavily around population and job expansion, infrastructure improvements, changes to zoning restrictions, as well as proximity to central business districts and amenities.

Coastal cities seeing strong inbound migration like Los Angeles, New York, Seattle, and Miami demonstrate resilient long-term investment prospects. Inland cities experiencing vibrant technology and manufacturing resurgences like Austin also present solid opportunities.

At a more granular analysis, investors examine school rankings by district, neighborhood crime rates, and access to retail and lifestyle conveniences.

Canada

Canada’s major metro areas of Toronto, Vancouver, Montreal and Calgary have all exhibited strong real estate investment demand in recent decades. Canada managed to avoid the worst of the 2008 financial crisis making it an attractive safe haven for foreign investors.

Key considerations include expanding infrastructure supporting population growth, job concentration in financial and technology sectors, and foreign buyer activity. Vancouver in particular has seen tremendous demand stemming from Asian buyers. Areas drawing overseas investors can experience disproportionate price increases.

United Kingdom

In the UK, London stands in a class of its own as one of the premiere global cities for real estate investment across all property types. But high prices in the capital have also sparked more investment in Manchester, Birmingham, and Edinburgh – cities with vibrant economic expansion.

Major infrastructure projects, global connectivity, top institutional investment demand, and restriction of housing supply all contribute to pricing power over the long haul. Prime central London locations like Mayfair command the highest premiums thanks to international capital flows.

Singapore

This financial hub of Southeast Asia possesses one of the world’s most robust real estate investment markets. With wealth far beyond its tiny geographic footprint, Singapore real estate sees incredible demand across the spectrum from luxury homes to commercial buildings.

Much of Singapore’s appeal comes from its role as a global business epicenter with vast numbers of expats relocating each year. As a result, prices hold up better compared to nearby countries if external shocks cause economic weakness regionally. Brand new luxury developments continually enter the market to keep up with relentless demand.

United Arab Emirates

Within the United Arab Emirates (UAE), Dubai has emerged as the focal point for real estate investment. Its world-class infrastructure, tax-advantages, global connectivity and afternoon temperatures cooler than elsewhere in the Gulf region sustain demand.

Developments with man-made islands/peninsulas or iconic “supertall” skyscrapers attract intense interest from celebrities, foreign elites and institutional investors seeking trophy assets in Dubai. Despite supply spikes and cyclical volatility, considerable wealth concentration within Dubai provides a baseline level of ongoing luxury real estate demand.

Key Takeaways

As discussed throughout the article, location remains paramount for all types of real estate investing. Each local market varies significantly in terms of demand drivers, barriers to entry, infrastructure improvements, demographics, job creation and overall investment prospects. Superior locations translate to better performance across factors like rental incomes, occupancy stability, tenant demand, appreciation, liquidity, risk mitigation and returns.

While correctly assessing market timing and cycles matters as well, properties situated in prime growth locations better weather downturns and maximize upside capture in up markets. Proximity to amenities, transportation access, recreational attractions, major employers and infrastructure improvements also boost desirability.

When evaluating investments, consider the old adage that when it comes to real estate – you cannot change the location, only the property itself. So focus first on finding ideal locations exhibiting future tailwinds, then explore assets to add to your portfolio within those high-potential areas.