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The single most important rule for buying investment real estate

Peter Churchouse

If you want to be successful in real estate investing, you absolutely must get one thing right.

I have invested in all types of real estate over some 40 years: and this factor has a bigger impact on property price than any other.

I’m talking about a property’s location…

It is the oldest cliché in real estate. But there’s more to it than meets the eye.

The basics of the “L”

A property’s location is the single most important factor in determining your investment success. That’s a fact.

You can buy the grandest house in the world. But if it’s next to a smoke-belching factory, or in the middle of a rundown neighbourhood with no prospects of gentrification or upgrade, you’re not going to build wealth.

Real estate prices can vary significantly at a very local level. The position of a property on one side or one end of the street matters. Prices can differ enormously within and across neighbourhoods, suburbs and districts.

The particularities of location are infinite. How do you judge the desirability of one position over another? How do you assess human nature? What really drives people to pay more for the same piece of property in one location versus another – not only now, but in the future?

When it comes to location, a few simple ideas have worked for me repeatedly over decades of investing in real estate in many different cities.

Like this…

1. Buy in “shirt and tie” areas

I buy properties in places where people wear a suit and tie when they go to work.

Does that sound a bit elitist? Perhaps. But this makes my life so much easier. People who wear a suit and tie to work are usually in higher-paying jobs. Therefore, as an upwardly mobile white-collar worker they are typically able to afford to pay more to buy property or to rent it.

In these days of casual work clothes, you’ll have to give this point a bit of latitude, but you know what I mean. I always buy in locations where white-collar workers want to live, whose earnings are in the higher salary brackets.

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2. Buy close to transport – or where transport is being planned

Your “suits and ties” need to get to work.

New transportation infrastructure, like underground rail, can be a major value-enhancing factor, in particular in big cities where getting to and from work can be a major hassle

For example, in Hong Kong, the construction of new mass transit rail lines has had a huge impact on property prices. In the early 1980s, the prices of residential property in the new town development of Tsuen Wan, some miles to the west of the densely developed tourism and office district of the Kowloon peninsula, sold at about a 40 percent to 50 percent discount to the more central Kowloon prices.

As the mass transit link to the new town came on stream, that discount narrowed to about 20 percent to 25 percent.  Anyone owning property in Tsuen Wan saw the value of their apartments rise sharply relative to prices in the core urban areas.

3. Look out for rezoning

“They aren’t making any more of this.”

You’ve probably heard this old saying when referring to beachfront land. But it applies equally to land in the inner core of prime cities. There is no new land being created in Central London, or Manhattan, or around Sydney Harbour, or indeed in many large cities around the world.

As cities grow, there are often increasing pressures on existing land resources that make land increasingly valuable. Recognising this, municipal authorities may dramatically increase how many people can occupy a particular piece of land.

For example, low-rise warehouse areas in the middle of a city may be rezoned for high-rise offices, or apartments, or hotels or retail.

So authorities are making more “use” of land by rezoning it from industrial buildings to residential or commercial spaces. in many areas around the globe. This is a reflection of the changing industries that work out of our cities, and the increasing populations of renters and home-owners who are attracted to city living. Look out for locations that could be moving from industrial to mixed use and you just could be onto something

4. Do the walk test

You don’t really get a feel for an area unless you visit, spend time there and walk around. Every location is different – and every micro area differs too. A lot of people invest without checking out the property, or the neighbourhood. This is a terrible idea. Unless you don’t care whether your real estate purchase makes money, you absolutely must kick the tires before you buy anything. And far and away the best way of doing this is to go there. Walk and walk and walk some more to get a feel for the neighbourhood, the shops, the people, the streets, everything. Seeing is believing – go take a look.

5. Local knowledge

You can research any location from anywhere in the world, thanks to the worldwide web. But if you want to find the best locations, you’ll need some local knowledge to back up your research. By asking a local, you might find a location you hadn’t considered before, or realise a location isn’t as great as you thought.

For example, a property next to a cemetery might not be a big deal in the West. But in China, where buyers take Feng Shui (that is, harmonising with your surrounding environment) seriously, a property next to a cemetery would be a horrible investment. Chinese investors wouldn’t be interested. It’s unlikely you’d find this information out on a basic web search. But any local would know.

So whenever you’re looking to invest in real estate, remember location is the one thing you can’t get wrong. It’s the first step to successful real estate investing.

Good investing,

Peter Churchouse

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