Location vs. a “Good Deal”: How to Choose
Most of us have heard the phrase “location, location, location.” It’s a common perception that location matters more than anything — and there is some truth to that.
But what if you find a great deal in a “not quite as good” location? Is it still a worthwhile investment?
It’s a great question that many people have asked me before. The short answer is, “it depends.”
Location for living, versus location for investing
When people say, “location, location, location,” they’re usually referring to choosing a property you plan to live in.
But when it comes to an investment property, you won’t be the one living there. Does this change things? Actually, it does.
You may, for example, find an incredible deal in a less-than-ideal neighborhood. Even though you wouldn’t personally want to live in that neighborhood, there may be plenty of other people who do. The key is finding a good, stable tenant in this scenario. If you do, then you have a great situation on your hands.
Unsurprisingly though, the less desirable the location, the harder it will be to find a quality tenant for your property. So location certainly does play a factor in how well your investment comes out.
Think of it this way:
When you are investing in a property, you want to think in terms of how you’re going to come out of the investment.
It may be a great “deal” now, but the cost of the property is just one factor. Does the price seem “too good to be true”? There may be a structural problem accounting for that. Hopefully not a nuclear reactive cesspool buried under the house — but a serious enough issue that you would need to look into.
If the price is related to the location, and the location is a less than ideal one, consider whether that may change over the years. If you see potential in the quality and security of the area in the long term — if there is the possibility of the location value going up in the future — then it may make sense as an investment.
The Bigger Picture
Here is a shortlist of factors to help you determine “location” versus “good deal”:
–What kind of tenant are you interested in having? More reliable and responsible tenants are likely to be in better neighborhoods (with more expensive properties). The trade off for a great deal on a property in a lower-quality neighborhood is often a less responsible tenant. There are always plenty of exceptions to the rule, but this is the broader reality.
-Think about structure, not just location. Location matters, but you want to make sure the structure itself is solid. If there are structural issues, be prepared to factor that into how much you will need to invest, financially. Sometimes a good deal is truly a good deal — other times it’s a red flag.
-What is the potential for appreciation? A great deal now isn’t as meaningful if the property won’t appreciate much over the years (or even loses value).
The bottom line: when in conflict, go with “location” over a great deal.
A good location is much more likely to keep appreciating, meaning that you will come out of your investment well.
But if you find a truly good deal in a not-as-great location that you have researched and believe you can make a good return on, whether in the short-term or long-term, then it may indeed be the right choice to go with. Careful research and weighing of options are all part of the process of being a real estate investor.