Real Estate Insight

Location! Location! Location!

There was a recent response to the post “Secrets for Timing The Real Estate Market”. It brought up a valid point that I thought would be worth discussing here. The response was this:

“Like any real estate advice, this seems very positive. I agree with everything that was said, however, I think you have missed an important component. Location!
Depending on location you could purchase a piece of property that may never increase in value during your lifetime. Look at areas where severe economic hardship has set in (Detroit & Chester). I would like to see data that supports these timing statements. Graphs are always nice too.”

The response argued that location should have been mentioned as another important component. While I’d agree that location plays a factor in real estate, time is much more important. There are lots of components to consider when analyzing a real estate investment. If I included every one of those components here, it would be, at least confusing, at worst discouraging. Location has been widely accepted as the most important factor to consider. With that being said, let me dispell another myth:

Myth: There are only 3 things that affect the value of real estate: Location, Location, Location.

The response continued on to say “Depending on location you could purchase a piece of property that may never increase in value during your lifetime.” citing Detroit, MI as an example. While widely believed, that remark is incorrect. The fact is time, not location, would be the determining factor. Of more than 275 major metropolitan cities in the U.S., every one of them, including Detroit, has gained in value since 1980. Sorry, I’m still learning how to insert graphs here. Instead, go to OFHEO,the federal office that keeps these stats. Did you realize that since 1980, Michigan real estate prices have increased by almost 215%. Detroit over the last 5 years has increased 4.4%. Modest but at least an increase in value. Last year, the real estate values in Detroit decreased by 3.3%. These stats support the principle of time being the determining factor.

Time vs. Location

I was born and raised in Hawaii. I formed a belief from an early age that the Leeward coast on Oahu was a depressed and impoverished area that investors should stay away from. That belief is shared by most locals. In the mid 1990’s, I met a young investor who came to Hawaii with less than $100,000 in his pocket to buy real estate. He didn’t have any preconceived notions about the Leeward coast. Instead, he did his homework. He instilled real estate investment principles and, despite location, invested heavily into that area. Ten years later, he has amassed a real estate portfolio worth over $15 million. Time, not location, determined that. The area’s severe economic hardships have shown little or no improvement since the mid 90’s. Despite those economic conditions there, anyone who invested in that area 10 years ago has expereinced some of the best appreciation on the entire island. Imagine if he had not invested in the area for reasons of location and economic hardship. Real estate will always appreciate in value over time.

Real Estate Deals in Detroit

And just to show you that Detroit isn’t as bad as you think, check out this link: Detroit Deals. Professional real estate investors don’t follow the crowds or buy into prejudices. They use sound investment fundamentals to make their decisions.

I thank Turtle for his response and encourage more to do the same.

Happy house hunting!

Elliot Lau