Everyone’s heard it said with respect to buying real estate for investment. The top three criteria that impact a purchase are: Location, location, and location. And in the world of apartments, high-rises and other multi-family commercial real estate investments, this old adage is certainly applicable.
You ignore location at your own risk. For example, what happens if the main factor you consider is lowest cost per square foot. You may be in for a lot of financial pain when you want to rent or sell the property.
Thousands of investors have paid rock-bottom prices for properties that they thought were fantastic deals. Later, they found out the prices were low for a reason.
For example, the area around a property was distressed due to companies and jobs moving out of the area. Or, the area is in a downward spiral due to rising crime, drug use, unemployment or increasing numbers of homeless people who live on the streets.
The first and most important point to consider when it comes to the location of your investment is the job outlook for the surrounding area. There are five simple questions related to the stability and outlook for a particular location.
First, is the stability of the job market. Are the employers in thriving industries? Are they adding people or laying off people? Is there a diversified array of employers and no dominant employer? If a single employer is dominant, how stable is the company and business strategy? Is there any chance this employer will be down-sizing any time soon?
Second, is the average pay in the area. Can people afford to pay the amount of rent you plan on charging? Check around to determine the average pay for residents who live close by.
Third, is school systems. Are the schools graduating students with good reading, writing, and arithmetic skills? Baltimore was recently in the news when 15 high schools did not graduate one student who was proficient in math.
Fourth, this may be counter-intuitive, but do any high earners work or live in or near the location of your building? High earners tend to attract higher quality service providers.
Fifth, would be other types of amenities, for example supermarkets, drug stores, health care, car dealers, and other signs that are indicators for purchasing power. These services can be the first to leave town when communities fall into the distressed category. Hence, all of the empty storefronts.
The price/rent ratio is another critical point that may impact the location of your multi-family investment. It is a simple financial tool that functions like the price/earnings ratio of a stock.
Real estate investors use an area’s price/rent ratio to determine whether or not to commit capital to a property in a particular location. In an optimal situation you are looking for locations where real estate prices are low and the rental rates are relatively high. These situations aren’t hard to find, thanks to the Internet and the algorithms companies use to find undervalued properties.
This ratio will help you avoid mistakes and make better decisions when you invest in multi-family properties like high-rise apartment buildings.
To calculate an area’s price/rent ratio, simply put its median price for the type of real estate you’re considering over its median annual rental rate. And voila, you’ve got a quick and convenient tool that’s been serving real estate investors for decades.
Perhaps the best attribute of this tool is it’s a quick easy way to compare real estate investments in different markets.
The projected population growth or decline of a given location is also a very important statistic to look at when you are comparing different locations and investment opportunities. The higher the population of an area, the greater the demand will be for living spaces, forcing up the prices of both homes and apartments.
You should be very aware, some communities are contracting, while others are expanding. For example, high tax states are losing population and lower tax states are experiencing influxes of population. Expanding populations mean lower vacancy rates, higher rents, and higher rent increases.
There are also second-tier benefits to population growth from the point of view of real estate investing. When an area is experiencing rapid growth, commercial developers will naturally take the opportunity to develop shopping malls, strip shopping, hotels, grocery stores and other types of commercial real estate that may be in close proximity to the location of your property which makes it more desirable (higher rental income and lower vacancy rates).
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The last of the location criteria we would strongly recommend reviewing is the crime rate in the surrounding community. There are a number of factors that make this statistic important. For one thing, higher crime drives down an area’s desirability. Crime drives out businesses and jobs and imports drugs and other undesirable characteristics of distressed communities. This translates into lower rental rates and higher vacancy rates.
Following are six tips for checking crime rates:
High crime rates drive down economic development and expansion in an area or neighborhood. Not only are developers unwilling to build in crime ridden areas many businesses choose to relocate to safer, more profitable locations.
Empty stores may be your best measuring stick for determining the stability of various locations.
No matter what type of real estate you’re investing in, location should be a major factor in your decision-making process.
Following our suggestions is a great way to start, but they are the tip of a very big iceberg. Investing in real estate is not for the faint of heart. You will be up against experts and their teams of specialized professionals. As with any investment, finding a knowledgeable professional can help you better navigate the waters.