Most of us have heard the old adage “location, location, location” when it comes to buying a good property that will grow well over time…but it’s a bit vague to base your investment strategy around this saying.
They are right in saying that the location is probably the most important factor, although you do have to buy the right type of property for that location and also the right property for your own portfolio.
But for now, let’s concentrate on why location is so important.
Depending on whether you are investing in residential, commercial or industrial real estate, the drivers that support a location will be different. For the sake of this discussion, we will focus on residential properties.
Invest in My Home Country or Abroad?
It is always going to be easier to invest in your home country since you know the local laws and requirements for buying a property. Buying in a different country means you need to do a lot of research to find out things such as:
- Will I be taxed in this country and if so, how do I abide by their tax laws?
- Will I be taxed in my own country as well for this foreign property?
- Can I get finance in my own country for the overseas property or do I need to get finance locally?
- Am I getting a good deal in respect to that particular market?
- How will currency fluctuations impact my results?
Most people will start looking at overseas property if they think they can get a much better bargain than at home. Sometimes it will be for tax purposes as well.
Currently there are many foreigners buying into the US real estate market since it is so cheap, but as stated above, you need to be confident of what you are doing and it’s not for the novice investor.
Where is the Demand?
When researching locations, it is important to know what you are looking for and why. A market is created around supply and demand of a product. In this case, the product is residential real estate and the supply is dictated by people who already own these properties.
The demand comes from the people wanting to buy property.
When supply is significantly greater than demand, prices of the product tend to fall.
When demand is significantly greater than supply, prices of the product tend to rise.
So in researching our location, we want to look for indicators that will show demand outstripping supply in the future period of holding the property.
Analysing indicators that will show people wanting to buy and rent in a particular area will help you determine if that area is going to grow well in the future. Here are some indicators to look at:
- Increasing population growth
- Increasing employment opportunities
- Industries moving into the area
- Governments investing in the area (such as Transport Infrastructure, Commercial Buildings, Improving Street Appeal etc)
- Types of schools that are in demand close by for families with children
- Lifestyle amenities such as public gyms, aquatic centres, shopping centres, golf courses and parklands
- Educational institutions for student populations
- Retirement facilities for aging populations
- What’s the rental vacancy rate?
- What proportion of people rent versus those who own their own home?
How is the Supply Looking?
If you are looking to buy an apartment or townhouse, supply can be a critical factor. Because they are normally built in complexes of multiple dwellings, it can be quite easy for an oversupply event to occur.
If you are looking to buy a house, you may want to check out how much vacant land is being released in the surrounding area. If there are large estate developments going on, this can possibly create a higher supply. Plus, given the choice, a lot of people may go for building their own house on a block of land rather than buying an older, pre-existing house.
If there is very little vacant land in the area, then an oversupply of houses should not be an issue unless the demand drops off significantly.
So you can see that by doing methodical, practical research into the area you are looking to invest, you are giving yourself a greater probability of existing growth in your investment over the short to medium term.
This is much better than just having a “gut feeling” that the area you like will do well (and you’d be surprised how many people rely on that emotion).
Treat your investing like you would buying a business and research thoroughly so that you can be confident you are making a wise investment.
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