The right location for you
What I’m about to tell you is nothing new; location is key to successful property investing. But although we all know this, you’d be surprised how many people give lip service to this and end up buying the wrong property in the wrong area
So what sort of location should we be looking at when starting out in property investment? The answer largely depends on why you are investing and what you are hoping to achieve.
Generally speaking, there are two reasons why an investor will buy property – either for income or for capital appreciation. Of course, many investors may aspire to a mix of both but will usually have a leaning one way or the other.
In broad terms, some locations have good prospects (long term) of capital appreciation, where as others are better for high yielding properties. So, empowered by the knowledge of what they are trying to achieve, you’d think that an investor would need only to seek the location where they will find “their type” of property. The reality though, is slightly more complicated.
Decisions can be swayed by emotions, and remaining objective especially if you’re just starting out, isn’t always easy. To give an example, making a buying decision that is heavily influenced on the fact that you wouldn’t want to live in the property you are thinking of buying yourself. Or, discounting a property purely because you don’t like the existing bathroom.
As I mentioned in my blog post last week, to become a successful investor you should base your decisions on the investment potential of a property and whether it will work in line with your goals. So rather than considering how you feel about the property emotionally, you should instead focus on whether there’s suitable rental demand for the location of the property and how a potential tenant may feel about the bathroom rather than yourself.
Following on from this, you should then consider the risks that might be associated with the location, and quantify the likelihood of any of these risks actually materialising. In other words, conduct a probability analysis.
For example, is there any possibility that the property you’re interested in could be subjected to a compulsory purchase if the local authority enlarges a local regeneration area? Or, what if the area you’re considering fails to undergo the regeneration that’s under consideration – how would the outcome impact on your investment then?
The truth is that property can be high risk or it can be low risk, depending upon what you buy and where, as well as why you’re buying.
To give a real life scenario, not so long back I bought a property that I intended to refurbish and let out once finished. I was buying with two criteria in mind – to increase the value of the property by more than I would spend on the refurbishment and to obtain a suitable return on my capital by renting it out.
To achieve my high target yield I choose a property in what some investors would consider a risky location, and I had to weigh up both the positive and negative risks associated with owning this property. (It certainly would have been poor investment practice to base my decision to buy purely on the yield).
Not only did I question if I would actually achieve the target yield, but if the area might stagnate or even decline in the short term or long term. It’s important to mention that not only was the property not in a particularly desirable area, but on the same street sat a derelict property and a property occupied by known drugs dealers.
However, my research from talking to neighbours and the local authority revealed that the derelict house had been subjected to compulsory purchase by the local authority and was being transferred to a Housing Association. Refurbishment work was scheduled to begin within twelve months.
Nevertheless, until the property was completed and the drugs dealers were gone (either evicted or sent to prison), I imagined demand from owner-occupiers would be somewhat diminished.
But as the remainder of the street was improving, I took the view that a serious decline in values was unlikely. In fact, values could fall by say 10% – 15% before I’d be in negative equity. My investment plan was to hold the property long term for yield, I was prepared to ride out the storm if there was one.
All in all, I felt that on the balance of probabilities I had much more to gain long term in owning this property than I was likely to lose short term, and although the risks were certainly very real, in the long run they seemed unlikely to be detrimental.
My analysis therefore went much further than just looking at location.
In my opinion, looking at location without undertaking a risk analysis in light of one’s investment strategy and financial goals is merely scratching the surface. Before any investor takes steps towards buying a property, a true understanding of all the “what if” scenarios and an assessment of their impact really is crucial.
With regard to the scenario in question, the derelict property has now been refurbished, the drug dealers have moved on and there are signs that its owner is about to undertake a full-scale renovation. Long term, I am confident that my risk analysis was correct and that my purchase will prove to be a safe, high yielding property, in an improving area.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to www.ThePropertyTeacher.co.uk/PSStrat