Why location is essential when investing in property

When looking to maximise the value of your property portfolio, location is an essential factor to consider. We explain why expanding your search outside of your location is vital when investing in property and how looking at the broader market can dramatically increase your profits.

Why is location important?

“Location, location, location” is a common motto among people working in real estate as the three most important factors of investing in a property. It’s excellent advice, except most people misunderstand what it means.

A common mistake people make when investing in real estate is considering the property as the most critical factor rather than the plot they have acquired once purchased. The property can always be changed, renovated or remodelled. The one thing that can’t be is location.

For instance, the property market can be a battleground between investors and homebuyers in a real estate boom. However, history highlights that properties in the best locations will hold their value more and depreciate slower once the market has cooled.

Fundamentally, an average property in a great location will achieve a higher return compared to a great property in an average location.

What characteristics define an excellent property location

If location is such an essential factor when looking to invest in real estate, what are the characteristics that define a good location for a property? The following locational factors should be considered when looking to invest in property:

  • City
  • Street
  • Property prices
  • Rental yields
  • Tenant Demand
  • Population growth
  • Uptake in new business – i.e BBC moving offices to Manchester 
  • Safe community
  • Access to good social infrastructure
  • Transport links
  • Proximity to business hubs
  • Future infrastructure developments

Don’t be afraid to look outside of your location

Many property investors, especially when at the start of their property investment journey, feel more comfortable investing in locations they are familiar with. This tends to be where they have grown up or spent the most time.   

This is an instinct because it’s where they feel they have the most control over their investment. It’s more convenient, easier to manage if things go wrong, and they better understand the area. But this comes at a cost.

What if something goes wrong with the property?

Many investors fall into wanting to be close to their property investment. If anything goes wrong, they can be there quickly to fix it. 

That’s fine if you have the skills, network, and knowledge to be hands-on; however, you could employ a reputable letting agency, or vetted handyman online to manage this as an investor. If you are investing in  new development, many come with a developer guarantee.

 It’s not uncommon for property investors to rarely visit their investments, if ever at all. Would you visit the Tesla HQ after buying shares in the company?

Location market knowledge

When you know an area well, you will identify which locations and streets are good and bad from an investing viewpoint. However, local knowledge can be gained by researching a potential area and speaking to local experts.

There is nothing wrong with investing locally if it meets your strategy. But this can come at a cost. As an investor, you will want the highest potential return on your investment. You could be losing out on significant yield if you are restricted by geography when looking to invest in real estate. 

Relationship between location and property prices in the UK

To understand the relationship between location and potential property investments within the UK, we can look at data from the 2021 Hometrack Housing Report

The UK saw house price growth of 7.4% in 2021. Which, at first glance, sounds significant to an investor. However, as property investors, it is crucial to understand this doesn’t mean every area saw a 7.4% growth.

Analysing the data further highlights an 11.5% difference between the best and worst-performing regions:

  • Best house price growth: Liverpool 10.7%
  • Least house price growth: – 0.8%

Manchester property performance vs the UK

The graph below highlights the property price performance between Manchester and the UK from the Referendum in 2016 to February 2020.

This shows a significant growth in Manchester properties compared to the UK average. * Data from the HM Land Registry.

This again highlights how looking at the headline figures can be a mistake when investing in property.

London property has always been perceived as an excellent investment for overseas investors. However, compared to Liverpool and Manchester in 2021, there was significantly more potential to maximise the value of their property portfolio by widening their geographical search.

We can now begin to see the importance of a property investor keeping an open mind.

Understand your emotions when investing in property

Trusting your ‘gut instinct’ should never form part of your property investment strategy. However, buying property and investing is emotional. Therefore, it is vital to understand your emotions.  

All property investors want to know is how to maximise their property investment? One of the most important factors to understand is the difference in mindset between buying your own home and purchasing a property for investment. 

This can be easier said than done. When most of us buy or rent a property for personal use, it is a highly emotional purchase. When investing in property, try to take the emotion out of your decision and treat it as an asset. 

Property investors are confronted with several emotional barriers which can lead to poor decision-making:

  • Fear 
  • Indecisiveness
  • Procrastination

Fear of missing out, over-capitalising, pursuing the ‘perfect property’, blurring your purchase intention and/or objectives, and renovating to your taste are some faults that can lead to a financial downfall in the form of un-tenanted periods, low rental income, or limited capital gain.

However, when purchasing property for investment, we need to replace emotion with fundamentals and data.

Make a data-driven decision

When deciding on a location for property investment, you should consider:

  • Data of the area
  • Affordability
  • Regeneration
  • Population growth
  • Wage inflation.

Begin with the macroeconomic view on why a particular area could be primed for rental and capital growth. Then dial down to the micro-location and only then choose the property. 

With property investing, nothing is guaranteed, but we can make an informed and intelligent decision. Providing we keep an open mind.

Enter your details below

Let us help you