Location, Location, Location

Posted on: 06 August 2008 by Gareth Hargreaves

A well-known adage, but one that is crucial when investing in property abroad.

Location, location, location – whilst this is a well used saying, it remains probably the most important factor when buying an investment property, and it is easy to see why.

Very simply, the location of your investment property dictates how much yield you get, and how much capital growth, which ultimately dictates how well your investment will perform for you.

Why Is Location So Important?

Many property investors have traditionally purchased property close to the area in which they live.  This provides an element of comfort, as investors often buy in areas they are familiar with.  It also gives you the advantage of being able to ‘keep an eye on the property’, fix problems and possibly manage it yourself rather than use a letting agent.

This approach certainly worked well in many regions during the 1990’s.  However, with rising property prices and rental rates not keeping pace with property inflation, this has meant that rental yields have fallen to uneconomic levels in many areas.

With interest rates at current levels many property investors are now finding that the rent they receive, after paying letting management fees, is less than their monthly mortgage payment.

With new markets opening up literally all over the world, this strategy could be costing you thousands, or even tens of thousands of pounds, euros or dollars in lost opportunities in the long term.

Compare this to professional property investors, who own property all around the country they live in, or even all around the world.

Which Location Do I Choose?

When choosing the location for a property investment, consideration has to be given to what is likely to draw people, who will ultimately become your tenants, to the area?  

It is equally important to try to understand what will drive property prices forward in the medium to long term, and ask yourself whether the demand for rental property is sustainable?

Some of the factors that suggest growth include:

1. Growing, developing economies, such as countries entering the European Union, and areas receiving high levels of investment in their infrastructure.

2. Investment by either central or local government in regeneration areas will have a positive effect

3. Demand outstripping supply indicates more people desire property than can be supplied, usually due to increased numbers arriving, which could be due to higher birth rate, high numbers of jobs created, lower prices than similar properties elsewhere.

4. Availability of mortgages, particularly in countries where they have not previously been available.

5. Low cost of borrowing – if interest rates are very low, people are more likely to buy, in particular for buy to let, as they will be more confident that they can cover all costs and establish a good yield.

6. Close proximity to popular locations and ease of accessibility to points of interest.

7. New transport links generally have a positive effect on property values.

Get It Right & Grow Your Portfolio

It is critical to understand the need to buy a property that will give you a good return.  By looking further afield there are many great opportunities to build a portfolio; however, you have to be selective and work with people who can advise you on the most likely growth areas to buy in.

Once you have found a property you need to pay attention to:

• The likely return or yield, and capital growth
• Buying costs and selling costs
• Cost of borrowing money, i.e. interest rates
• How attractive the property will be for likely tenants and or buyers.

It is also imperative that there is sufficient tenant demand to provide a rental income sufficient to cover your mortgage payments.

If you get these factors right you are one step closer to your goal.

Building Wealth

To build wealth through investment property, you need a “location, location, location” where there will be strong capital growth.  If property prices rise in value and your rent covers your mortgage costs, you can ultimately build wealth, allowing you to purchase additional properties and build a portfolio.

As at the end of 2007 the number of UK citizens who own property overseas has surged to 3.62 million and that number is expected to double over the next 5 years.

More and more investors are looking overseas - to growing economies and established areas - where there is scope for further growth.

By Derick Ivimy

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