Location Matters in Real Estate and Here's Why

What are the first three rules of real estate investing? Location, location, location! We have all heard it before and there’s truth to it. Location is essential to real estate; it can drive up home values and affect the way people live.

Both new homebuyers and real estate professionals alike consider location as a primary factor when looking at property, but have you ever wondered why? In Part 1, we share what we learned about the importance of location from a local group of homeowners and landlords.

A Great Location Enjoys Higher Appreciation in Value

The house does not always matter. Imagine you are looking at two homes in the same neighborhood: one costs more and has all the desirable amenities, but it sits adjacent to a busy road. The other house requires TLC but is located on a larger, quiet lot. Which house will likely enjoy the most appreciation in value?

If you chose the home with upgrades, you’re not alone. Real estate agents have reported sellers falling for the common misconception that if you invest $20,000 in kitchen renovations, you increase the value of your home by the same amount for resale. Some sellers tend to forget that the structure itself and the things within the house are depreciating assets. Informed homebuyers will take into account deterioration and value the kitchen less than what the seller believes. No doubt, buyers and sellers have opposing views of a home’s worth. Now, factor in the location. Better yet, remove both houses and compare the small lot near traffic to the large one in a quiet space. Generally, large lots in the best neighborhoods have higher demand, with prices to match.

The market value of the land has a bigger impact on real property appreciation. What this means is that some homes will appreciate more in value and at a faster rate than others because of the land they sit on. Also, land appreciation can actually offset the speed of depreciation on structures.

Of course, it would be remiss not to state that a home’s value is subjective. To an owner or prospective buyer, a home holds intrinsic value even though it might be hours away from a city or across the street from a noisy school. Individuals place value on their homes based on their preferences, circumstances, or lifestyles.

Location Matters for Rental Properties

Are you thinking about becoming a landlord? Location is also important to real estate investors shopping for rental properties. They will take the time to analyze and run numbers because they are looking for potential appreciation and projected positive cash flow. Determinants of a profitable rental property are—to name a few—nice neighborhoods, good schools, low crime, low vacancy rates, high rent demand, and a strong job market. All of these have something in common: location.

For example, some landlords reported earning a good cash flow from rural properties in the midst of a boom in the energy sector, like big oil, and then later experienced a surge of vacancies after that industry dies. Others expressed their luck of owning properties in the heart of Silicon Valley where tenants compete with each other and pay more than double the national rent average. These are a few examples that support location as an important factor when choosing where to buy a home.

What to Look for in a Location When Buying a Home

We learned why location is important. Next, let’s look at what to look for when finding the right location for you. In Part 2, we’ll go over a comprehensive collection of tips to help homebuyers decide where to buy a house.

1. You like what you see and hear. Is there an eyesore visible from your house? How is the noise level when you’re trying to sleep?
2. You can walk to your favorite hangout. Walkability increases property values because people generally enjoy a short, pleasant trip to their destination.
3. Crime rate is low. Safe neighborhoods are highly desirable and command higher home prices.
4. You see pride of ownership. Do neighbors maintain their properties? Are streets cleaned and are houses in tip-top shape?
5. The location is in a good school district. Many prospective homebuyers want to send their children to the schools with the best academic record.
6. Public transportation is accessible. Homes near public transit, like bus stops, are in high demand, as long as they are not in close proximity to railroads and subways.
7. Few homes in the neighborhood are in foreclosure. Foreclosures can negatively affect the value of neighboring homes.
8. You see good development. Be aware of commercial, industrial, and municipal developments. Some may be good for home values, like a new hospital, while high-density apartments can drive home prices down.

Final Word

A house in a great location enjoys high value, appreciates quickly, yields a better return on investment, and provides better cash flow if rented out. By taking the house out of the equation and leaving the land, you can get a good measurement of the property’s worth. That’s because, in reality, it’s not possible to pick up that house and move it to an exclusive area in town. There is a reason why the old adage, “location, location, location,” has stuck around for almost a century.