Saturday, March 7, 2009

Conspiracy of Location, Location, Location !

Have you ever heard of someone telling you the 3 most important things in property investment ?  Then he repeated saying the word "Location" 3 times ?

Well I have!  I have heard that so many times since so young that it was imprinted in my head without proper judgment.  You know, say the lie 100 times and it would become the truth. 
A lot of people got into real estate and their first few years ended up paying high lesson fee TOTALLY WASTED on this so call principal Location, Location, Location !  A Conspiracy !

First of all, have you ever heard seller saying the location is not that good ?  And therefore they are selling the property at a lower cost ?  - - -  N O ! - - -  Every location "can be" a good location.

Do you know that sometimes property at the right side cost much higher than the left side even though at the same location, same build up, same type of buildings ?  - - - Yeap !  You Bet ! - - - Usually by 2 different developers.

Why is there always a few units in the Golden Location not able to sell out or always make a lost in resell ?

If Location is really the Number 1 factor in property investment, all the above should not happen at all.

This miss conception is originated from the developers.  Whenever developer launches new projects, they will make a big deal about the location.  No doubt at the time they promote the project, the location could be a great place.  However, eventually whatever highways promised earlier may not be built later.  Sometimes even after the high way is built, the effect is negative rather than value increase.

Even if nothing happens to the original location, but when the same developer is launching another new project, guess which is the better location ?  Yeap !  The new one !  Not your older location.

Hence, this location factor is purely a speculation in real estate investment.

Like any investment, what really matter is its real worth and its current priceIf the price is lower than its worth, its a good buy.  Else its a good bye !

No doubt location is a factor, but it is NOT an important factor at all !  Most of the times it is merely a Personal Flavor factor.

Prime location property is easier to rent and sell out but more expensive and usually not available.

Secondary location is cheaper and readily available but harder to rent or resell out.

So give and take, the pros and cons of different location even out each other and do you need to compare properties between two locations ? - - N O ! - -  Not really. 

Different locations carry different characteristics and require different investment methodology.  But the principals remain the same ;

1.  Identify, calculate and verify a property's real worth
2.  wait and buy the property at big discount
3.  ensure continuous net cash inflow ie. Rental - Repayment = positive
4.  appoint experience management or agents at that particular location

So if you purely treat real estate as an investment, you don't really need to worry too much about the location as long as the 4 steps above are strongly adhered to.

There are only 2 decisions that may be affected by location ;

1.  Get a location near you or a location that you love personally.  That way, should the investment goes south, you may temporary enjoy the non tangible personal qualitative returns - a personal flavor as mentioned above.

2.  Location can be the reason NOT to buy a property, but it should NEVER be the reason you put money into it.

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Anonymous said...

People will repeat the Mantra "Location, Location, Location!!!!!!" non-stop!


Because lot of them also not sure what is the answers :-)

Anonymous said...

This is what Azizi Ali and Ms. R. Leong have as their mantra. Location3.

I suppose if an investor's view is for cash flow, then he has to worry about the L3.

Mt. said...

alan, thats an interesting comment :)

moreincome, actually net cash flow = rental income > repayment. it can be achieved in any location. I have to wait 1 year for 3-4 sensible offers from Sg. Wang, but I can get 8-10 great deals from Sg. Buloh warehouses in a month. All net cash flow is about 1-2%.

But one shop in Sg. wang 1% is $3,000 while 1% in Sg. Buloh is $300 so even though all are 1% but it may take 10 properties in Sg. Buloh to reach the 'same amount' cash flow as in Sg. Wang.

Then again, total capital needed for 1 shop in Sg. Wang and 10 warehouses in Sg. buloh is the same 3-4 millions.

so the question is not location, but if you want to wait one year and pick one deal out of 3-4 deals like in sg. wang


pick 1 deal out of 8-10 offers a month and then do it for 10 months like in sg. buloh

both will give you same yeild. if follow the egg and basket theory, sg. wang method is higher risk while sg. buloh has higher flexibility.

forex-tiwisue said...

My area is currently developing and lots of lands have been developed to "Taman". Location always the "Headline" of the advertising as well as the "Word of mouth" of the visitors. Wording such as "Only 5 min to school, 5 min to pasar ..." keep appearing in the advertisements. And, the respond is good but whether the owners will move to the "Taman", I don't know. May it because different area have different selling point?

Mt. said...

this is the so called typical developer syndrome boosting up value for the location. there is no good or bad, its just smart (for now). for ppl who hasn't bought it, assess with care, for those who have bought it, join the game and spread the words how good it is :)

statistically 1 out of 7 such developer syndrome can actually successfully sustain value in long term.

BP said...

Interesting article. You might not agree, but I think one very important factor that is not in the property criteria is capital growth. First question to ask is why do you want to put your money into an asset that doesn't grow in value? This doesn't makes sense, right? If you agree, then the next one is what sort of property will have better capital growth compared to other which makes it a better investment option. This actually comes back to the basic question why it grows in value. To me, it's just simple as demand and supply kinda formula. If demand > supply then value up, else if supply > demand value down, else constant, eg what happen in the US now, heaps of foreclosure and flood of bad property in the market and price crashed => supplier > demand. But look carefully, is it all property value crashed? Looks at those property near CBD, major working hub, Stanford University, etc, is the value so bad? why not? I guess that's the demand myth, no matter what happen, there is still demand for this sort of property. Also look at historical data, what will happen during each recovery time? Why there is demand on this sort of property, what's in common? Do you think it's because of "Location"?

The next thing to think about is cash flow. Cash flow is the king, cash is important to survive, no money no talk. But why there is some properties have higher rental than other? if you can get positive cash flow (rental > repayment), why the tenant want to rent instead of buying? Wouldn't it better for them to buy instead of helping you as the owner to repay your loan?

Mt. said...

what u said is correct about property investment but you may miss some important messages in this article. I quote your words "is it all property value crashed?", like wise, I will ask "is ALL property values go up during good time in a good location?".

The 'good' location perception is only a general coffee talk, it can NOT be the main reason for one to 'invest' in a property - read the last sentence of the article. It however, CAN BE the reason not to invest in one.

BP said...

Michael, I totally agree with you, no doubt about that. What I try to share is about capital growth as the insentive or reason to invest in property and the factor that impact the long term capital growth which turn out to be so called location. There might be different opinion on good location definition from different party, seller will always claim that their property is of best location whereas the investor might think differently. There might be times that 2 same properties on different street within the same area have hugh different in value even though they are in so called good location according to seller. But what most important is the invesetor should do their due dilligence on this before proceed. There are many reason people invest in property, some looking for cash flow, some looking for capital growth and some for mixture of this. If for me, capital growth is the way to go and "location" do play an important factors on it based on historical data. However noted that this is different from country to country and area to area but just as a summary of what I noticed. Hey I might be wrong, just want to share my thought and get constructive feedback on this.

Mt. said...

your comment is a perfect summary, in real estate investment one just need to make sure

1) rental income > loan repayment = positive cash flow
2) increase capital growth either by
2a) follow development news and affect them
2b) self property enhancement

Above methods can be applied 'no matter' which location the real estate is at. in real life, the location factor is cancel out by (or reflected in) the selling price.

However, u have good point on your 'location', which is different than this article repeat-3-times-location.

very well said comment, keep it coming although I may not write much about property as I see that as an 'active' income and not a part of 'passive' personal finance vehicle ...

BP said...

Hehe, not sure if I should wash your brain but I do see it as passive though..... Anyway thanks for all the good articles in this site and I am sure it helps all the readers.

Mt. said...

can you email me a write up on how you can make property investment into a passive income ? I am sure it will be a good eye opener for many, thanks in advance.

BP said...

Certainly I can send something to you. I read lot of books, articles, attending seminar, spoken to the expert, pay lot of money on learning all this and implement that. Lot of info to talk about actually, try to dig it out and put it into a brief summary for you. But I must warn you that probably only 5% of the population will accept this thinking. Stay tune.

Mt. said...

then these remaining 5% should really come out and have a drink :)