There are sayings in some industries that everyone seems to know. The real estate business is no different. Perhaps the best-known real estate maxim begins with a question: “What are the three most important things in real estate?” The famous answer: Location, location, location.
Is location really that important? It is, but we need to examine the nuance involved in assessing location to grasp the wisdom of this proverb.
The first major location question we should ask about a specific real estate asset (land and/or building) is, in which larger geographical area is the asset located? For example, if an asset is in a high-tax, high-regulation state with fiscal problems and a diminishing population, you might want to look elsewhere to invest. Having said this, the asset may be offered at a significant discount compared to a similar asset in another, more attractive state or area. There is some nuance involved.
Once you have a handle on the state or general area, it is important to evaluate the area immediately surrounding the asset. For example, if a property or building is an outparcel (a lot immediately in front) of a new WalMart, that is generally an attractive location. This is due to the large amount of customer traffic attracted to the WalMart. If you are looking at a building with a tenant whose business fits well with the WalMart, this can be an excellent site. One great example is a discount grocer named Aldi located as a WalMart outparcel (or very close by). Aldi competes very well with WalMart and love to be near WalMart stores.
The best formula for long-term commercial real estate investors is to seek the best tenants in the best locations. Again, this does not necessarily mean the highest priced locations. What it does mean is that the tenant needs to be sufficiently credit-worthy and well suited to a given location or site. When those issues are addressed properly there is a higher likelihood the tenant will thrive and renew their lease. This is a recipe for long-term profitability. These kinds of assets generally make good investments.
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