In a real estate boom, buyers will clamor for almost any house that hits the market. This is great while it lasts, but unfortunately when the party's over, the homebuyers who chose the best locations will be left holding property that depreciates at a much slower rate. This discrepancy is largely a result of a home's location.
In Pictures: Top 5 Reasons Why People Go Bankrupt
"Location, location, location" is a common mantra in real estate. And it's good advice – except for one thing: most people have no idea what this really means.
A "good location" can mean different things to different people, but there are also subjective factors that determine a home's value. Depending on your personal needs and preferences, you may not be able to buy a home with all of these factors. And that's OK – after all, a home is much more than just an investment. However, next time you're shopping for a new property, keep the following factors in mind.
What part of a city you choose to live in will undoubtedly affect how much you pay for your home. Land is a finite commodity, so cities that are highly developed and are bound from large amounts of additional growth, such as San Francisco, tend to have higher prices than cities that have too much room to expand. For example, many suburban communities have become what the media has dubbed "slumburbs" because such a large number of homes are uninhabited that the areas have fallen into disrepair. In most cases, this urban sprawl occurs as a result of population growth, according to the U.S. Bureau of Census Data on Urbanized Areas. Between 1970 and 1990, the 100 largest urban areas in the U.S. sprawled out more than 14,000 square miles. When sprawling cities experience a population exodus, it's the outlying areas that tend to suffer the most sever declines in property value. (To learn how to exploit other inefficiencies in the real estate market, see Making Money In Residential Real Estate.)
The neighborhoods that appeal to you will largely be a matter of personal choice. However, a truly great neighborhood will have a few key factors: accessibility, appearance and amenities. Your neighborhood may also dictate the size of the lot on which your house is built.
In terms of accessibility, you should look for a neighborhood that is situated near your city's major routes and that has more than one point of entry. Commuting to and from work is a big part of many people's day, so a house with easy access will be more desirable than one that is tucked away and can only be accessed by one route.
The appearance of the neighborhood is also important. Large trees, landscaping and nearby green or community spaces tend to be desirable. You can also judge the popularity of the neighborhood based on how long homes in that area tend to stay on the market; if turnover is quick, you're not the only one who thinks this is a desirable place to live.
A great neighborhood should also include important amenities such as grocery stores, shops and restaurants. Most people like to frequent places that are convenient – if you need to drive a great distance to get to anything, this is likely to make your house less attractive. Schools are another important amenity – even if you don't plan to have kids, if you want to sell your home this is something many buyers will be on the lookout for. The distance from and quality of local schools both play into this. (For more insight, see 8 Signs Your Neighborhood Is On The Upswing.)
It's not just present amenities that matter, but future ones as well. Plans for schools, hospitals, public transportation or other public infrastructure can dramatically improve property values in the area. Commercial development can also improve property value. When you're shopping for a home, try to find out whether any new public, commercial or residential developments are planned and consider how these additions might affect the desirability of the surrounding areas.
- Lot Location
The next thing you need to consider is where the house is actually located. In this instance, there are a few things you should watch out for.
For example, if your home is on a busy road, you will probably get it for a lower price, but it will also be more difficult to sell down the road. The same may hold true for houses that stand next to or back onto commercial property, such as a grocery store or gas station, or houses on streets that get an unusual amount of parking traffic and parked cars, such as those near large churches or community centers. This is why a large number of such homes are rentals.
- The House Doesn't Matter
Suppose that you have narrowed your choices to two homes that stand side by side in a great neighborhood. One needs repairs and updates, but has a huge lot. The other is in tip-top shape but sits on a lot half the size. The prices of the two homes are similar. Which do you choose? This is one aspect of house hunting that surprises a lot of people (except for maybe real estate investors). In most cases, the beat up house is the better investment.
Why? Your house is a depreciating asset. The lot, on the other hand, will maintain its value (or likely appreciate) relative to the house. If you bulldozed both houses, the larger lot would sell for more. So, if you can, choose a bigger, better shaped or better situated lot over a nicer house. A less attractive house can always be updated, added on to or replaced altogether while the lot can't be changed. (To learn more, read Top 4 Things That Determine Your Home's Value.)
If you're still feeling uninformed, check out last week's business highlights in Water Cooler Finance: Auto Hope, Bubbling Oil and Obamanomics.