In a real estate boom, homebuyers will clamor for almost any house that hits the market. This is great while it lasts, but when the party's over, only homebuyers who choose the best locales will be holding the most valuable property that also depreciates at a much slower rate. This difference in value is largely a result of a home's location.
"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 it really means.
- Location is key to valuable real estate. Homes in cities that have little room for expansion tend to be more valuable than those in cities that have plenty of room.
- Consider the accessibility, appearance, and amenities of a neighborhood as well as plans for development.
- A lot's proximity to things like busy roadways and community centers may make it less desirable for resale.
- Acreage often trumps the quality of a house because land tends to increase in value.
Why is real estate location so important?
First, let's look at why that particular cliche—that the three most important factors when buying property are location, location, and location—became so popular.
If we stop to think about what we are actually buying when we buy property, the reason becomes clear. Though most people make a decision to buy a property based on how much they like the house or apartment, when you buy a property, you are also buying a plot of land. The house that is currently standing on that land can be renovated, remodeled, or even demolished and turned into condos. The one thing you can't change is the location of the land you own.
This fact is seen most clearly in suburban homes, where the limits of a property are marked out. However, even if you are buying an apartment in a city, you are also making an investment in a particular location. A city block can be a "good" or "bad" investment in just the same way as the neighborhood of a house.
This means that location is often the single most important driving force behind the value of a property. It's a simple case of supply and demand: Housing supply in great locations is limited by the number of homes in that location.
Good vs. bad location: key differences
There are many factors to consider when looking for a property in a good location, and we'll give you a detailed list of these below. At the broadest level, however, you should be aware that there are a number of important factors that are often overlooked when it comes to picking a good location versus a bad location.
The first is to recognize that the majority of homebuyers are millennials. This means that millennial tastes and preferences shape the desirability of an area and location. A location that is good for millennials has great transport links, good schools, and a feeling of community. A quiet, suburban location that may appeal more to boomers may therefore not be worth as much as you'd think.
The second important factor to recognize is that a "good" location or a "bad" location won't stay that way forever. Cities, towns, and even suburban communities are constantly changing, and neighborhoods can transition from less desirable to one considered "up and coming" within a few years.
In fact, this is probably the single most important factor when it comes to assessing a location. Don't look only at what a neighborhood is like now. Consider what it will be like in a decade. If a major employer has just opened near an affordable neighborhood, it's often worth buying in that location. Similarly, upscale neighborhoods seldom make for great investments because the properties there already include the price of their location.
The 5 factors of a good location
A good location can mean different things to different people, of course, but there are also objective 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, the next time you're shopping for a new property, keep the following factors in mind.
Where you choose to live in a city or town will undoubtedly affect how much you pay for your home. Land is a finite commodity, so cities like San Francisco that are highly developed and don't have much room for additional growth tend to have higher prices than cities that have too much room to expand. Some of these communities have a large number of homes that are uninhabited and areas that have fallen into disrepair.
In most cases, this urban sprawl occurs as a result of population growth, according to data from the U.S. Census Bureau. When sprawling cities experience a population exodus, it's the outlying areas that tend to suffer the most severe declines in property value. This is part of how location impacts the fundamental economic tenet of supply and demand.
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 in common: 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 a city's major transit routes and that has more than one point of entry. Commuting to and from work is a big part of many people's days, so a house with easy access to roads and public transportation 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, quality landscaping, and nearby parks or community spaces tend to be desirable. You can also judge the popularity of the neighborhood based on how long homes in that area 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 have to drive a great distance to get to anything, it's likely to make your house less attractive.
Schools are another important amenity. Even if you don't have kids, if you want to sell your home in the future, many buyers will be on the lookout for good schools. The quality of local schools and their distance from your house are both important factors to consider.
Finally, don't forget safety. A neighborhood that has a low crime rate and is an inviting and safe place to be outdoors and socialize with neighbors is the type of place where most people want to live.
It is not just the present amenities that matter, but future ones as well. Plans for new schools, hospitals, public transportation, and other civic infrastructure can dramatically improve property values in the area. Commercial development can also improve property values. 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.
A property's close proximity to a fire station, hospital, school, or community center can lower its value because of traffic and noise.
4. Lot location
You also need to take into consideration where the house is actually located. In this instance, there are a few things you should keep in mind as you conduct your search.
If the house you want to buy is right on a busy road or very close to a highway, you can probably get it for a lower price, but it will also be more difficult to sell later on. The same may hold true for houses that stand next to or back onto a 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.
Alternatively, a house with a wonderful view or near a body of water is likely to be more valuable, both now and when it comes time to sell it.
5. The house itself
There's one aspect of house hunting that tends to surprise people. Let's say you've 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 of the fixer-upper. The prices of the two homes are similar. Which do you choose? In most cases, the house in need of repairs is the better investment.
The reason: 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, but the lot can't change.
How to pick a desirable home location
All the factors in the list above are important when it comes to identifying a property with a great location. However, finding out whether a property has these desirable qualities can require quite a bit of research.
There are several techniques that can help you pick a desirable home location. If you are thinking of moving to a new neighborhood—or simply buying property in one—it's important to recognize that the locals are an invaluable source of knowledge. Mention to someone in a local coffee shop that you are looking to buy in the area, and you'll find that people are more than willing to share knowledge and insights.
For the same reason, it can be useful to book viewings with a few local real estate agents, even if you don't intend to use their services. As professionals who work in the industry, they will be able to give you pointers as to the most desirable (or the most profitable) locations in the area. They will also claim, of course, that their properties are all in great locations, so take what they say with a grain of salt.
When you've narrowed down your property or location list to a few candidates, there is no substitute for research. For each property you are considering, run through the factors above. Research which schools cover the location, how close the nearest supermarket is, and how a millennial professional would get to the nearest office district. Note all this down, and only then make a decision about the very best location for your home or investment.
Why Should Schools Factor Into Location?
Research the local public schools even if you don't have kids or plan to have them. The reason? A reputable public school district can boost an area's home values and will figure into the profit you can realize when you want to sell. Also, you’ll want to attract the greatest number of potential buyers. Many buyers target neighborhoods with strong public schools.
What Else Should I Look For?
Check out the transportation and nearby amenities. Buyers usually want convenience when it comes to shopping, grocery stores, dry cleaners, and entertainment. For transportation, consider roads and public transportation, such as bus stops, subway stations, and public bike-share locations. Close proximity to amenities will typically improve a home’s value.
Are Any Changes Coming to the Area?
Research whether anything is going to substantially change the area, such as any planned developments or construction or new housing starts. A location may seem ideal only to undergo sweeping changes in the near future—of course, some changes could be positive ones that improve an area's desirability.
The Bottom Line
Location isn't entirely subjective—in fact, it's based on a fairly static set of criteria. When you set out to shop for a new home, make sure the neighborhood isn't just desirable to you but has objective qualities—such as attractive amenities, safe streets, and good schools—that will help ensure your investment appreciates in value over time.
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