Proximity vs. Location

When you think about real estate, particularly when looking to purchase a house, I would venture to guess that you’ve heard the phrase "Location, Location, Location", uttered at least once.
"Of course I have, but what does it matter?", you respond.
As Real Estate Investors, part of what we have to embrace to be successful, is a willingness to take a situation and look at it differently. With real estate, there is sometimes too much focus on where exactly you find a property, be it the city, neighborhood, zip code, etc. When you focus so much on the location, and the characteristics of that location, you might not pay attention to what is around that location, or in proximity. This post is going to look at proximity and how it plays into the many decisions a real estate investor has to make.
In this post, I’m going to cover the following:

• What I mean by proximity

• What factors of real estate ownership and management are affected by proximity

• How to overcome proximity challenges

What do I mean by Proximity?

Proximity can be a difficult concept to wrap your head around. To ease into the topic, let’s start with a definition.
Proximity: Nearness in place, time, order, occurrence, or relation.
Basically, how close you are, or a property is to someone or something, has a clear tie to how much affect is felt in the interactions between the two items. A good example of this is the force of gravity. The force of gravity is expressed as the inverse of the square of the distance between two objects. The closer two objects are, the more effect they have on each other.
I am sure you are now asking how in the world that relates to real estate. Just like with planets and gravity, the nearness that defines proximity, has different effects on both a piece of real estate, and people, places and things that it has a relationship with. I think that these effects are equally as important as a list of attributes a particular piece of real estate gains from its location.

What factors of real estate ownership and management are affected by proximity

• Ownership control – Firstly ownership control is basically how much influence you have over your property. Secondly it is the amount of interaction you have with your property. The closer you are, the easier it is to visit and make sure that everything is running smoothly. You could take this back to the very point of purchase. This should be a major factor in your decision of whether or not to purchase a particular piece of real estate.
  If you desire to be closely involved in the management of a piece of property, then distance must be taken into account. Other ownership functions that come into play include managing your property management team. If they are a significant distance away from you, then phone and email will be your primary forms of communication and oversight. This will require more diligence on your part to ensure that the property is being managed to your standards.
• Management quality – Whether you manage your own property, or have a property manager do it for you, the proximity of that property to the managing entity will have a direct effect on the quality of the service. The closer and easier a task is, the more likely it will be handled first. If your property is farther away from a property manager than another one that they manage, it is likely that the closer one will receive better attention.
  The management company will naturally focus more on the property that is easier and more convenient for them to access on a regular basis. This makes it extremely important to take into account the location of their office relative your property when selecting a property manager.
• Profit potential – The potential profit for a property is dependent on the possible rent you can charge as well as the expenses that you will incur in managing and maintaining the property.
• Tenant Selection – When you are looking for tenants for a property, there are some specific characteristics you are looking for including distance they are moving, adequate income, employment status, etc. A number of the factors that affect the potential tenant pool rely directly on proximity. These include proximity to a higher income area, distance to centers of employment, distance to colleges and universities, etc.
  With a particular tenant, proximity to their previous address is a factor because the farther they are moving, the more risk you take in renting to them. When they are moving a long distance, it generally is a relocation involving a change in employment, and this may not work out in the long run.
  Your number of potential candidates increases when the property is located closer to centers of employment, and to colleges and universities. People want to live close to where they work and/or go to school. They also want to live in areas that are either already established as higher value, or are developing in that direction.
  Proximity works in the other direction as well with regard to prospective tenants. Being close to a high-value area increases the value of your property by association, and thus, the rent that you may be likely to charge. Higher income areas attract higher-income people, who tend to be more stable tenants in the long run.
• Property Values – The most obvious way that property values are affected by proximity is in the use of comparable real estate valuations used in an appraisal of a property. A couple other factors were mentioned above. The nearness to a higher income area will generally have an upward effect on property values. Also, if there is an area undergoing redevelopment or renewal, real estate in and around that area will tend to see a gradual increase in value if the redevelopment process is a success. Proximity can even be seen as having an opposite effect from the gravity model described above. In the case of proximity to a college or university, some property close to the school may have a lower value than one slightly farther away. This is due to the perceived negative of traffic and crime in and around the school. The properties slightly farther away benefit from the distance of being outside that traffic/crime bubble, and gain from the higher income employment at the school and higher education level of residents of the area, all of which lend to increased property values.

How to overcome challenges of proximity

The challenges you may face that are related to proximity fall into two groups:

1. Those that are related to the surroundings of the property
2. Those that are more interaction based, whether with you the owner, a manager, tenants, etc.

The first set of challenges are ones that you need to be aware of when you are first considering purchasing a property, or converting an existing property to an investment property from a residence. Some examples of these are being close to a less desirable area, whether because it is rundown or due to high crime, distance from employment centers, transportation, etc. You need to know about these going in, or have an idea of the conditions around the property prior to purchase. Once you own the property, these are items that you have very little influence over or ability to change. In the case of a property in or near a lower desirability area, your insight into future redevelopment plans may guide your decision to either purchase or pass on a property, or whether to sell an existing property.
The second set of challenges may be avoided or remedied through actions that you take during the course of your ownership. Some examples of these challenges are property management problems, lack of knowledge of issues at a particular property, and a limited tenant pool. The majority of these all stem in one way or another from the proximity of you, the owner, to the property, or a property manager to a property, or lack of knowledge of the positive rental factors in proximity to your property. Sometimes the cure is to find a property manager who is closer to your property. This will make it more likely for them to visit the property more often and increase the level of care. If your property is part of a complex, it may be worth hiring an on-site manager to keep you apprised of activity, whether good or bad. If you are having trouble finding tenants, ensure that you are focusing your search in places with a high concentration of qualified candidates. This might include specifically posting notices around a school, or on a school Facebook page. Don’t limit yourself to just one demographic. Instead, post on a number of sites, or use different keywords that play up the positive attributes of your property that may appeal to these differing groups.

Wrapping this up

When evaluating a potential real estate investment, proximity, or how close a property is to other factors, provides the other half of the equation to the sole physical location of that property.
Proximity factors include distance from the owner/manager and relative distance to high value neighborhoods, schools, shopping, or commercial centers. These factors all impact how well the property is managed, how much it is worth, the tenants you can find, and the rental income you may expect to generate.
Some of these factors are more important when you are first purchasing or converting a piece of real estate to investment property, for example how close other neighborhoods, schools, commercial centers, etc. are, as you cannot change these once the transaction is complete. Others, like finding a property manager or finding better tenants are more fluid, but mitigating such problems may require more effort on your part.
In all of these cases though, what surrounds a piece of real estate and how it interacts with those surroundings, is as important as the specific location of the real estate investment.