Location is everything. It affects the rents you can charge, to the yield rates and any appreciation you enjoy. But how do you identify the ideal location to give you the best returns?
Here are my thoughts on narrowing your search:
- Identify your investment strategy
- Get to know your target market
- Leverage demographic data
- Understand appreciation and yield rates
- Doing your real estate investment groundwork.
Here’s why each of these is so important:
Knowing what you want to achieve helps to narrow your choices
How do you know if a location is the right one? It is always the one that delivers the objectives of your overall investment strategy.
If you’re trying to build regular income from rental properties, then you will need to find locations that help you to do this. Certain areas are popular with tenants. Others aren’t.
Alternatively, if you want to add value to a property through improvements, then again, certain areas will offer you more opportunity. And if you want to buy a property and watch its value appreciate, find an underpriced area that is on the up.
It might seem obvious. But when you have a clear idea of your goals, you can narrow your search for new properties and see which offer the best potential returns.
Key takeaway: Define your financial goals first, even before you look for properties.
Find the people who will provide the return on your investment
Who are you buying the property for? A common mistake among novice investors is buying properties they like, but their target market doesn’t. So, think about who these people are. They’re providing the return on your investment – so who are they, and where do they live?
Once you know the kind of people you want to appeal to, you can begin to narrow down the areas where these kinds of people might want to buy or rent.
Key takeaway: Knowing your target market helps with the location search.
Demographic data helps to narrow your location search
The best way of understanding this is to crunch the available demographic data. For example, in Austria the STATISTIK AUSTRIA website and the German equivalent, the government’s GENESIS-Online database, are both useful sources of information. For more general European demographic information the Eurostat publication ‘People in the EU: who are we and how do we live? is also helpful.
Demographics covers everything from the gender, occupations, age, spending power and education to the income of your target market.
It helps in trying to narrow down your location search because underlying demographic trends in different areas can give you a sense of the way the market is moving.
As is always the case with any kind of data, it is useless if you don’t know how to use it to your advantage.
Take one demographic trend in Europe as an example – the increasingly ageing population. This trend could have implications for the locations you look at. Some areas may
see more demand for homes for older tenants. Others meanwhile may see an increase in demand for properties that are popular with younger workers – who in turn may have migrated into the area from other markets.
Key takeaway: Use all the data available to buy the right property, for the right customer, in the right location, at the right time.
Get a sense of how prices are moving, as well as yield rates
Yield rates and appreciation figures are invaluable.
Using them, you can narrow down the areas you’re looking at and make comparisons between similar properties in different locations.
Yield rates give you an idea of the rental income you are likely to see from a particular property expressed as a percentage of the price you pay for it. This takes into account both the cost of the property and the expected rental income.
This helps you to have a more realistic sense of the value for money a particular property in a particular location represents. Where the yield rates are highest, you will potentially get the most rental income for the smallest investment.
If you’re looking longer term, then it is all about appreciation. This is the value that you can hope to add to the property over time.
So, look at what property prices have historically been in the area you’re looking at. Get a feel for what the upper limits might be before you invest.
Key takeaway: Use yield rates and appreciation values to get a sense of which areas represent the best value for money.
Walk the streets to find the best locations
Location is actually made up of a number of different elements, including the two we’ve covered above:
- Demographics – data on the people who live and work in the area
- Local market performance – including yield and appreciation figures.
But there’s more – namely the physical infrastructure and built environment itself.
This covers factors such as:
- Transport links
- The proximity to places where people work, relax and spend their money
- Environmental factors like levels of pollution, and how many open green spaces there are.
Ultimately, these factors have a huge impact on the desirability of any location you are looking at. They also have a direct relationship with the demographics and economic health of an area.
So, our advice is to do your research – read the reports and assess the available data.
But also it is crucial that you get out there and get a firsthand feel for the area – experiencing the place for yourself before you consider investing your money.
Avner Motaev Blog 