An essay on choosing the right
micro location in property purchase
When deciding about a property purchase as capital investment, the selection of the correct location plays an important role. “Location, location, location” is probably the oldest wise saying in the field of real estate; even the Roman Emperor Caesar evidently recognized this and built his forts at top-locations, like Rhine (Rhein) and Main.
Until today, nothing much has changed about it. "Rhein Main" could be said to be a typical major or macro location.
But once one has agreed about the macro location, the rest of the homework is far from being complete. About just as crucial is the question of the micro location.
What is a micro-location? Let’s consider a city as Frankfurt / Main as the macro location; it is the city (or if applicable the region - in this case the Rhein Main region), the larger perimeter of choice.
In other words, the micro location is the small location, the “mini location” within the larger scope, the macro location.
This can be explained easily with some current examples. As before, we are taking Frankfurt Main as model. Without question, Frankfurt is always part of the top real estate locations in Germany; it generally ranges traditionally next after Munich as number two or sometimes number three but seldom further down.
But Frankfurt does not equal Frankfurt, even though there are no really bad locations versus extremely good ones in this small but important town of trade and commerce. Just to make it clear: Munich and Berlin have between 1.5 and 3 Million population, Frankfurt has just about 680.000. Of course if one looks at the whole Rhein-Main region and includes the suburbs and surrounding cities between Darmstadt and Bad Homburg, between Wiesbaden and Hanau, the number of populace surpasses that of Berlin easily. But that is not our topic. Rather we ask: How does it look within Frankfurt in regards to the so-called micro locations?
We are going to limit this question a bit further and concentrate only on residential locations as there are also micro locations for offices, retail trade, businesses in the service sector, businesses in the logistics sector and other groups of industry; an example are commercial areas newly opened up to logistics and trade like the new large market hall in Kalbach, in the very north of Frankfurt.
However, for a private investor, who wants to invest in a property as capital investment, normally the residential property is what interests him most – hence we can examine the best micro locations with regard to living.
Which are the best living locations in Frankfurt? No problem to answer that, if one is an insider and knows the city – of course one first would name Sachsenhausen, Westend, Nordend, Bornheim and almost in the same breath.
But strictly speaking however, these are only districts and no real micro locations.
Within Sachsenhausen one finds those very desired and highly settled residential quarters (Sachsenhäuser Berg [Sachsenhauser Hill], Schweizer Platz, Malerviertel (painters quarter; so called as most street names there are those of famous painters of the past) as well as more average residential estates such as the area between the Lokalbahnhof (local station) and the Offenbacher Landstrasse in the direction towards Oberrad, or the whole range of houses around the Paradiesgasse in the Old Sachsenhausen Pub Area; good for fun, but not necessarily good to live in and less posh than many other areas in Sachsenhausen. Whereas, on the contrary, the area near Südbahnhof (the main Sachsenhausen train, tram, subway station) is very much sought after, especially in the direction towards Schweizer Platz.
But strictly speaking, we have to ask a second question: If we allege that some areas are less desirable, we need to ask: Less desirable for whom? For everone? Or reverse: Are there people who like to live in locations that are “less desirable for some”? When going for a stroll in the streets around the local station one will find out very fast that no flat stays empty apparently, thus some people obviously don’t mind. Someone is always living there – after all, it is still Sachsenhausen, is still Frankfurt.
Here enters the question of one’s own investment philosophy. Let us take the example of an average investor who would like to let out lastingly for a good rent to a clientele who works in Frankfurt, has a good level of income and more elevated demands to the living ambience.
Didn’t we just define a target group for our acquired property? Exactly so!
Thus we, as potential investor, always need to ask the following questions first:
Whom would I like to have as tenant? Which kind of future tenant do I have in mind as my partner, who shall pay the major part of the property for me in the long run, but who is also willing to take care of it and to treat it well?
Admittedly, most capital investors seldom ask themselves such difficult questions, or they simply work out that point of the checklist without further ado in their subconscious.
Also this is easily understood:
Anyone who spent half of his life in a certain city, knows intuitively the areas he should avoid and those he should look for. And he knows which clientele of tenants likes most to live where. In accordance with this, he will make his pre-selection without needing any sophisticated preparations.
We have however asked a crucial question for the understanding of the term micro location. That question is: Which clientele of tenants do I want to get?
And just for the fun of it we might as well compile a list of criteria which we could choose from afterwards and which might look like the following:
- Singles in well-paid job positions
- Young couples both working in frequently jobs
- Families with 1-2 kids good income bracket
- Tenants for a short time in furnished apartments
- Well-off double-wage-earners with secure jobs, senior executive positions
- Older couples retired
- Tenants with / without pets
- Extended families
- Tenants with academic background
... etc. Let us assume, we are choosing target groups number 1, 2 and 4 of the list above (we could extend it as we like). Now comes the next task:
What micro locations do these target groups preferably live in? Lets stick to our example of the Rhein Main area.
The answer is found through easy investigation. The following micro locations apply to Frankfurt for the three named target groups:
- (1) Sachsenhausen (around Schweizer Platz)
- (2) Westend (everywhere)
- (3) Nordend (everywhere )
- (4) Bornheim around Berger Strasse and Merianplatz
And surprisingly enough it is more often than not exactly in that sequence. Of lesser importance for these target groups are the following locations within the area of the city centre; one could mention them also as number 5 and 6:
Bockenheim/Leipziger Strasse up to the embassy district (Diplomatenviertel) as well as the city centre area between Goethestrasse and Konstablerwache. Sachsenhäuser Berg (Sachsenhäuser hill) can be mentioned as number 7 – this last one is not as much preferred by these target groups due to the distance to the S-Bahn (city and suburban railway) which is a 10-15 minute way by foot; but this area is very much preferred because of the exclusivity of location by for example target group number 5 “Well-off double-wage-earners” or also well-situated couples with children (our target group #3).
What does this mean in regards to our property investment?
It is almost self-evident – in one of these locations we should buy.
With the questions of the right micro location answered, we should concern ourselves with the attainable rent and the overall costs of the purchase – and as the second step we should have a good look at the return on investment (ROI).
Even if we cannot explain everything here that is of importance on all aspects of a property investment, we hope that we have passed on some essential tips in regards to choosing the right micro location.
Knowledge of a place is of course part of choosing the right micro location – which means you should preferably not buy a property in a city you do not know without having seen the both the location and the property. Not even in Frankfurt, Berlin, Munich or any other town for that purpose (at least not in Germany). The reason for this is: Imagine you now buy in Frankfurt-Bornheim – a good location, as everyone will say – and the object lies in the north outskirts of Bornheim, the Dortelweiler Strasse for example, across the transport fleet. Not a particular high-quality area. In times of high demand you may be able to rent out well simply because shortage prevails and the tenants are making cuts with the quality of their living-locations.
But what when the demand lessens? Then the following phenomena enters in:
Good up to middle quality micro locations will suffer least of the demand going down.
Micro locations that are not as good will drop to another category of target group.
Very high-quality micro locations could suffer of being unoccupied for a longer time if these are depending on a too high-established income stratum.
The best advice is to get good professional advice before any such investment, and that is even true when buying not to rent but to use it as one’s own home.