A great location will ensure that you have an easy time attracting renters and give you high financial rewards. Although people will have a different definition of the best location, a great investment location should appeal to your target market and be profitable for you. In this chapter, you will learn about picking the best location for your investment.
Real estate investment is like any other business. Therefore, demand and supply determine your profits. The ideal business should offer something that everybody wants or needs (high demand) and what it has to offer should not be easy to replicate (limited supply). A real estate investment can only be successful if the tenants have good jobs. Understand the job market of the area. Consider the following:
- The number of jobs; is the number increasing or decreasing?
- The median salary; is it increasing or decreasing?
- The types of jobs; low-paid laborers, high-tech or professional?
- Diversified jobs; a stable variety of job sources or 1–2 main industries?
People are always moving to locations with better jobs. They are also attracted by things like natural attractions, weather, local politics, and the price of housing.
The ideal location for real estate investing is one with an increasing population. The price/rent ratio is a great and easy way to evaluate the profitability of an area.
The rent/price ratio is determined by dividing the median price by median yearly rent. For example, if the median housing price in an area is $200,000 and the median yearly rent is $15,000, then the price/rent ratio is $200,000/$15,000 = 13.33. A location with a high rent/price ratio is not good for business.
Small Scale Location Criteria
You have a better chance of success if you own properties where many people would like to live such as near a major economic center. Romance, in this case, is something that makes people emotionally attracted to a location. The decision on where to live is based on emotion.