Location Targeting for Higher Investment Returns
Location targeting is one of the most important stages of successful property investing. The basic property investing philosophy promoted by many property gurus is that of finding a motivated seller, buying below market and quickly reselling at market, thus making a handsome profit. No disagreement with the premise of the strategy. Although this philosophy does not necessarily suggest that location should be ignored, someone might be tempted to focus on finding the “right seller” and place lesser importance on the issue of location targeting.
It should be noted that the feasibility of the motivated-seller strategy will depend on how easy it is to find truly “motivated sellers” that are indeed selling below market value and are not self-declared “motivated sellers” that are just trying to grab your attention in order to have you inquire about their property.Furthermore, the ultimate test for identifying a true motivated seller is whether his/her asking price is sufficiently below the property’s “true market value”.
Determining the true market value of a property is not to be taken lightly, since that is the number that will actually determine whether you are looking at a good or a bad property investment opportunity. Making such a determination is not a simple task and requires lot’s of due diligence for the specific property you are considering. So, yes, the premise of this strategy sounds attractive and solid, but implementing it is not a piece of cake and requires serious and thorough examination and evaluation of the properties considered, before committing any funds.
Another thing to bear in mind when implementing the aforementioned strategy is that there are a lot of investors out there chasing motivated sellers. So, what happens if you can not find a truly motivated seller and a property that you can buy at a sufficiently below-market price? Well, here is what I am recommending. Don’t stop your search for motivated sellers, but consider alternative areas in your market and do apply some location targeting principles. Buying below market value is advisable within any investment-strategy context. At the same time though, try to understand the price and location dynamics of the market within which you are operating and try to identify areas, locations and neighborhoods where property values have good prospects to rise in the near future.
High Value Growth Locations
Property values are more likely to increase in the future at two types of locations:
1) Locations with favorable market fundamentals, that is, high demand and low supply, and
2) Locations that are about to strengthen their locational advantages (such as complementarity of uses or broader accessibility from the urban area) due to new major developments and urban transportation and infrastructure projects
I refer to the first category of locations as locations with market-drivenvalue-increase potential and to the second category as locations withdevelopment-driven value increase potential.
Areas with market-driven value-increase potential have the following characteristics:
1) Low vacancy rate (the vacancy rate is the number of vacant units over the number of total units in an area); for the housing market a 5% vacancy rate is considered healthy.
2) Only a small number of new housing units or apartment buildings are in the pipeline (have received building permit or they are under construction); this will secure that the market will not be flooded with lots of units in the next one-two years, resulting in price declines.
3) The area is growing rapidly in terms of population and/or income and is expected to continue to do so in the next couple of years
The above conditions are likely to fuel price increases, as the rapidly increasing population and income will generate rapidly increasing demand for housing, which will interact with a restrained supply (low vacancy rate and limited pipeline).
Within this context, appropriate location targeting is strategically advisable and can enhance the profitability of your residential investments, even if you are implementing strictly a strategy of finding motivated sellers and buying below market value. Location targeting will also reduce your risk in case the price you pay is not really below market