When investing in property, analysing whether a location is an investment hotspot or somewhere you should avoid is vital. We explain why location is crucial for property investing, and what factors to consider to identify the best location.
What You Will Learn
- Understand why location holds paramount importance in property investing.
- Gain insights into the connection between location and property price variations.
- Discover the potential pros and cons of investing in familiar versus unfamiliar regions.
- Learn about the key factors that define a good investment location.
- Grasp how emotional barriers can affect property investment decisions and the need for data-driven choices.
Property investment can deliver a regular income and long-term growth – even during a recession and uncertain times. So, as more people look to invest in property, one of the most critical questions is: How to choose the best location for property investment?
Location is essential when looking for property investment in a prime market for future growth. Therefore, it is critical to understand the fundamental indicators that suggest a property market will increase in rental and capital values.
Why is Location Important for Property Investing?
“Location, location, location” is a common motto among people working in property as the three most important factors of investing in a property. It’s excellent advice, except most people misunderstand what it means.
A common mistake people make when investing in property is considering the property as the most critical factor rather than the plot they have acquired once purchased. The property can always be changed, renovated or remodelled. The one thing that can’t be is location.
For instance, the property market can be a battleground between investors and homebuyers in a property boom. However, history highlights that properties in the best locations will hold their value more and depreciate slower once the market has cooled.
Fundamentally, an average property in a great location will achieve a higher return compared to a great property in an average location.
Relationship Between Location and Property Prices in the UK
To understand the relationship between location and potential property investments within the UK, we can look at data from the 2021 Hometrack Housing Report.
The UK saw house price growth of 7.4% in 2021. Which, at first glance, sounds significant to an investor. However, as property investors, it is crucial to understand this doesn’t mean every area saw a 7.4% growth.
Analysing the data further highlights an 11.5% difference between the best and worst-performing regions:
- Best house price growth: Liverpool 10.7%
- Least house price growth: Aberdeen – 0.8%
Manchester Property Performance vs the UK
The graph below highlights the property price performance between Manchester and the UK from the Referendum in 2016 to February 2020.
This shows a significant growth in Manchester properties compared to the UK average. * Data from the HM Land Registry.
This again highlights how looking at the headline figures can be a mistake when investing in property.
London property has always been perceived as an excellent investment for overseas investors. However, compared to Liverpool and Manchester in 2021, there was significantly more potential to maximise the value of their property portfolio by widening their geographical search.
We can now begin to see the importance of a property investor keeping an open mind.
Don’t Be Afraid to Look Outside of Your Location
Many property investors, especially when at the start of their property investment journey, feel more comfortable investing in locations they are familiar with. This tends to be where they have grown up or spent the most time.
This is an instinct because it’s where they feel they have the most control over their investment. It’s more convenient, easier to manage if things go wrong, and they better understand the area. But this comes at a cost.
When you know an area well, you will identify which locations and streets are good and bad from an investing viewpoint. However, local knowledge can be gained by researching a potential area and speaking to local experts.
There is nothing wrong with investing locally if it meets your strategy. But this can come at a cost. As an investor, you will want the highest potential return on your investment.
You could be losing out on significant yield if you are restricted by geography when looking to invest in property. Learn more about remote property investing.
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- Discover the economics behind successful property investments and learn how to build a hands-off portfolio for long-term success.
What Factors Determine a Good Investment Location?
If location is such an essential factor when looking to invest in property, what are the characteristics that define a good location for a property?
The following locational factors should be considered when looking to invest in property:
- Property prices.
- Rental yields.
- Tenant Demand.
- Affordability ratio.
- Population growth.
- Transportation and accessibility.
- Business activity.
- Wage inflation.
- Local amenities and quality of life.
- Crime rates and safety.
Understanding how to analyse a location for these factors will help you identify the best location for your property investment.
The city where a property is located can significantly impact its investment potential. Different locations have unique characteristics influencing property values, rental yields, and tenant demand.
Factors such as the local economy, job market, population growth, and overall desirability can affect the property market in a city.
When considering a city for investment, it’s important to research its economic prospects, employment opportunities, and growth trends.
Cities with strong economies and job markets will likely see higher tenant demand and property values, making them more attractive for property investment.
The specific street on which a property is located can also significantly determine its value and investment potential.
Factors such as street appearance, noise levels, and proximity to busy roads or commercial areas can influence the desirability of a property.
A well-maintained, quiet street with a good neighbourhood atmosphere can make a property more attractive to tenants and buyers, leading to higher rental rates and property values.
Conversely, properties on noisy or poorly maintained streets may be less desirable, affecting rental yields and appreciation potential.
When evaluating investment opportunities, property prices play a crucial role. Therefore, it’s vital to research the local market and understand average property prices in the area.
By comparing these prices to similar properties in other locations, you can determine if a property is overvalued or undervalued.
Investing in properties that are undervalued may offer a better long-term return, as they have the potential for quicker appreciation. Find out why property prices rise.
Rental yields express the annual rental income of a property as a percentage of its purchase price.
To determine rental yields, it’s necessary to research the average rental rates in the area and compare them to property prices.
High rental yields often signal solid tenant demand and potential for growth. On the other hand, low yields could imply a weaker rental market or that property prices are overvalued. Learn more on the differences between rental yield and capital growth.
Tenant demand is essential when investing in property, as it directly affects rental yields and vacancy rates.
High tenant demand can lead to higher rental and lower vacancy rates, which can positively impact the property’s overall investment performance.
To gauge tenant demand in an area, research local vacancy rates, rental growth trends, and demographic factors, such as population growth and employment opportunities.
Strong tenant demand is generally a positive sign for property investors. It can contribute to stable rental income and long-term capital appreciation.
The first thing you should look at is the affordability ratio for the location you are looking to buy a property in.
The affordability ratio is a simple calculation that acts as an indicator of whether housing is affordable for people living there.
Housing affordability is calculated by dividing average house prices by average annual earnings for a specific location.
Housing affordability Calculation
Housing affordability ratio = average house prices / average annual earnings.
Let’s say the average price of a property in a location you were looking to invest in was £150,000, and the average salary was £25,000
The affordability ratio = 150,000/25,000 = 6
Therefore the affordability ratio would be six.
The affordability ratio for housing allows us to see whether a particular property market is either overheating or undervalued.
One of the factors you need to consider when choosing the best location to invest in is the area’s population growth:
- Booming population: Increase in property market growth and valuation, the higher the return due to demand.
- Declining population: You may struggle to sell or rent your property, and the value may drop as there is less demand.
What property investors are constantly trying to identify is whether the population in a particular area will increase, which will lead to a higher demand for property and, consequently, higher rental and capital values.
To achieve a premium rent and higher asking prices for your property investments, you need to find locations with an undersupply of properties compared to the demand from potential tenants and buyers.
An increase in population can also affect the other key factors determining if a location is a good investment. For instance, population growth can result in new infrastructure and regeneration – which contributes to increasing the value of your investment.
A population can grow for many reasons, and not all of them translate to higher property prices.
However, suppose you can identify that the population has grown in line with business activity. In that case, you have a realistic potential for organic capital appreciation – a rise in an investment’s market price.
Transportation and Accessibility
Transportation and accessibility play a significant role in determining property value and investment potential. Proximity to public transportation, highways, and other essential infrastructure can increase the desirability of a property, leading to higher rental rates and appreciation in property values.
Well-connected locations with easy access to public transportation, such as train stations and bus stops, are typically more desirable for tenants and buyers. In addition, access to major highways and roads can make commuting easier, which is essential for working professionals.
A well-connected location also facilitates access to essential services, shopping centres, and job opportunities, making it more appealing for residents and increasing property demand.
Regeneration is another critical fundamental that suggests an increased demand for property in a particular area in the future. Infrastructure drives property prices, so the most successful and experienced investors follow infrastructure trends.
Regeneration will either provide social, economic or environmental benefits. Some examples are:
- Transport links such as a new train station or airport.
- Education in the way of new schools or universities.
- Environmental factors such as the government’s decision to create a new park.
- New commercial properties and business hubs.
The most crucial regeneration factor from a property investment perspective is commercial property.
If you can identify areas where additional office space is being added, this will lead to an increase in business activity, job opportunities and overall demand for property.
Let’s look at the most densely populated areas in developed countries. It is no coincidence that these areas generally command the highest property prices.
- London – Affordability ratio 10
- New York – Affordability ratio 11
- Paris – Affordability ratio 19
- Tokyo – Affordability ratio 13
We can see the affordability ratios of these cities all exceed ten times earnings. That doesn’t mean that there aren’t areas within them that are good for investment.
However, there are other locations with more affordable housing and better fundamentals, which will produce a greater return on investment.
Cranes dominating the skyline should be a welcome sign for property investors.
AHR Global Property Director
People move to areas where there are job opportunities. Therefore, identifying a significant increase in business activity within a particular location will lead to a rise in population as workers move for work, which leads to an increase in wages.
To identify this, you can research the area you are thinking of buying a property by looking at the historical trends for unemployment rates.
This will highlight if the location has consistent job growth and stability – an excellent indicator for housing demand – compared to a more unstable location.
Wage inflation is a key metric that can allow you to predict whether a property market will see future growth.
Wage inflation means people are earning more in real terms. Therefore, if wage inflation outpaces normal inflation, consumer spending will increase, and potential tenants and home buyers will have more disposable income.
This leads to rental and capital appreciation – this is what we would consider organic capital growth.
Local Amenities and Quality of Life
Local amenities, such as schools, healthcare facilities, and recreational spaces, significantly influence property value and desirability. These factors contribute to the overall quality of life for residents. Consequently, they can directly impact property market demand and investment potential.
Good schools and healthcare facilities in the area can make a location more appealing to families and individuals seeking a comfortable living environment. In addition, recreational spaces, such as parks, sports facilities, and entertainment venues, provide opportunities for leisure and relaxation, further enhancing the area’s desirability.
Moreover, access to shopping centres, restaurants, and other services can greatly impact the convenience and attractiveness of a location.
Crime Rates and Safety
Crime rates and safety substantially impact property value and investment potential. Therefore, areas with lower crime rates and a strong sense of safety are more appealing to tenants and buyers, leading to higher property values and demand.
To research crime statistics in a potential investment area, you can consult local police websites and online crime mapping tools or talk to residents and property agents to better understand the area’s safety.
Understanding the implications of crime rates for property investing allows you to make more informed decisions about where to invest and avoid high-risk areas.
Understand Your Emotions When Investing in Property
Trusting your ‘gut instinct’ should never form part of your property investment strategy. However, buying property and investing is emotional. Therefore, it is vital to understand your emotions.
All property investors want to know is how to maximise their property investment? One of the most important factors to understand is the difference in mindset between buying your own home and purchasing a property for investment.
This can be easier said than done. When most of us buy or rent a property for personal use, it is a highly emotional purchase. When investing in property, try to take the emotion out of your decision and treat it as an asset.
Property investors are confronted with several emotional barriers which can lead to poor decision-making:
Fear of missing out, over-capitalising, pursuing the ‘perfect property’, blurring your purchase intention and/or objectives, and renovating to your taste are some faults that can lead to a financial downfall in the form of un-tenanted periods, low rental income, or limited capital gain.
However, when purchasing property for investment, we need to replace emotion with fundamentals and data.
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Make a Data-Driven Decision
When deciding on a location for property investment, you should consider:
- Data of the area
- Population growth
- Wage inflation.
Begin with the macroeconomic view on why a particular area could be primed for rental and capital growth. Then dial down to the micro-location and only then choose the property.
With property investing, nothing is guaranteed, but we can make an informed and intelligent decision. Providing we keep an open mind.
What If Something Goes Wrong with the Property?
Many investors fall into wanting to be close to their property investment. If anything goes wrong, they can be there quickly to fix it.
That’s fine if you have the skills, network, and knowledge to be hands-on; however, you could employ a reputable letting agency, or vetted handyman online to manage this as an investor. If you are investing in new development, many come with a developer guarantee.
It’s not uncommon for property investors to rarely visit their investments, if ever at all. Would you visit the Tesla HQ after buying shares in the company?
When investing in property, we have explained why location is crucial for successful property investing. Property can always be changed, renovated or remodelled, but the location cannot.
As highlighted in the article, an average property in a great location will achieve a higher return than a great one in an average location.
Therefore, expanding your search outside your location is essential when investing in property. Learn more about investing in property remotely.
Overall, carefully considering the location is vital if you want to maximise the value of your property portfolio.