How Location Impacts Property Expenses

Everyone always talks about the maxim “location, location, location” in real estate, but without talking about property valuation impact - how does an undesirable location truly affect income and expense levels at an apartment building.  I’m not talking about physical plant deficiencies…just strictly the impact an unfavorable location has on property cash flow:

Turnover Rate

Rental properties in less desirable locations typically have a higher turnover rate because when residents aren’t happy they shop around for housing alternatives more frequently.   

Turnover Expense

A higher resident turnover rate results in more money spent on getting the unit in rent ready condition so that it can be marketed to the next renter. This is also known as a higher turnover expense. 

Marketing Expense / Downtime Vacancy / Concessions

Given the less desirable location it’s more than likely that the unit will take longer to lease which results in more marketing dollars needed, higher vacancy loss, and may even require leasing specials to get the unit occupied again (elevated concessions).  

Bad Debt Expense 

Some property owners that find themselves owning an unfavorably located asset may struggle to find qualified tenants so they make exceptions to their tenant qualification criteria. These exceptions result in increased “bad debt” expense.  

Repairs and Maintenance / Insurance Claims / Courtesy Patrol

Lastly, undesirable locations also lend themselves to more unfortunate mishaps such as vandalism which leads to elevated repairs and maintenance expenses and potentially the need for recurring courtesy patrol (onsite security visits).  Eventually the more strain put on a repairs and maintenance budget, the more inclined the operator is to file insurance claims which results in elevated premiums.  Then at time of sale, when the buyer requests historical insurance loss runs all the minutiae will be brought to the fore and may result in a more challenging insurance procurement process for the next owner.

Conclusion

Point being, an inadequate location impacts income and expenses before you take into consideration that investors will likely want to step into a higher capitalization rate to take on any perceived risk the property may present.  The result is that location has a compounding detrimental impact on value.