Location analysis for investment properties
That's the spot!
Where to? Location, location, location
When you buy a property as an investment, you must look at several factors. In contrast to buying a home, it doesn't matter if your investment property is where you want to live. A sensible return with a good cash flow, little to no risk of vacancy, and a solid value appreciation are way more important. And, of course, the price has to be right.
All of these factors are majorly influenced by one thing: the location of your property. An apartment in Berlin will cost you way more than a property in Chemnitz but also has a higher potential for value growth. An apartment in Hamburg will have a minimum vacancy risk but will also give you lower returns compared to a more affordable place in Leipzig. But that's not all: even within a particular city, you'll have significant differences from district to district. That's why a location analysis is so critical. You have to pay attention to both the macro factors and the characteristics of the neighborhood.
Spoiler Alert: You won't be able to combine all four factors ideally in one location (otherwise, everyone would invest in the same properties) but you can minimize or at least weigh out your risk factors. Read the article below to determine which locations will give you the best outlook for which aspects and what we recommend for investment beginners.
The macro-location and the "City ABC"
When looking for the right location for your property, in addition to your budget and investment strategy, you should first find out which areas offer which advantages. Although the demand for real estate is generally higher than the supply, some regions are more sought after than others. And that also affects your investment. That's why you should look at the so-called macro-location, i.e., the rough location factors that affect the city or region.
In this context, you may have stumbled across the term "ABCD cities." This categorization was established by bulwiengesa, an independent analysis company. They divided cities into four categories: A-, B-, C-, and D-cities. But beware: A-city does not necessarily mean good, and D-city does not necessarily mean bad, even if that may initially sound like it. Originally, this classification was a simple, objective way to sort cities according to their size and functional importance. No more and no less. The focus was on locations for commercial real estate. Only later were residential properties included, which is why some critics believe that the categorization is now outdated as a valuation standard. That hasn't stopped it from being a widespread practice. Now it's often considered in combination with other macro factors, e.g., population and population development:
Population and population development
Economic and purchasing power
Labor market & unemployment rate
Rent development and vacancy rate
Traffic connections
Value development
Future potential
We have listed the opportunities and risks of all categories here:
Opportunities of A-cities
Examples: Hamburg, Munich, Berlin, Frankfurt am Main, Cologne, Stuttgart, Düsseldorf
Very low vacancy risk due to high demand, a large number of residents, and a high immigration rate
High value development
High rents
High security & predictability
Internationally important business locations
Excellent sales opportunities
Risks of A-cities
High purchase prices
Low return and often negative cash flow despite above-average rents
Opportunities of B-cities
e.g. Leipzig, Dortmund, Hanover, Dresden, Nuremberg, Bonn, Bochum, Duisburg, Essen, Karlsruhe, Münster, Wiesbaden, Bremen, Mannheim
Lower purchase prices than in A-cities
Higher yields and better cash flow than in A-cities
Rising rents
Value development
Low vacancy risk
Nationally important business locations
Good security & predictability
Rising relocation rates
Good sales opportunities
Potentially increasing relevance due to remote work capabilities etc.
Risks of B-cities
High competition due to increasing demand
Opportunities of C-cities
e.g. Magdeburg, Aachen, Erfurt, Bielefeld, Darmstadt, Heidelberg, Kiel, Erlangen, Regensburg, Rostock, Wuppertal, Braunschweig, Augsburg, Lübeck, Constance
Relatively low purchase prices possible compared to A- and B-cities
Regionally significant business locations
High yield and good cash flow possible
Moderate sales opportunities
Increasing relevance due to remote work options and the like
Risks of C-cities
Higher vacancy and general investment risk
Lower performance than in A and B cities
Low move-in rates
Less certainty/plannability than in A or B cities, more research required
Less reliable data & metrics than A-cities
Success depends on individual property
Opportunities of D-cities
e.g. Coburg, Ingolstadt, Bamberg, Schwerin, Schweinfurt, Eisenach, Chemnitz, Lüneburg, Aschaffenburg, Trier, Ulm, Wolfsburg, Zwickau, Bremerhaven, Heilbronn, Jena, Hildesheim
Relatively lower purchase prices possible compared to other categories
Moderate regional significance
High yield and good cash flow possible
Moderate sales opportunities
Increasing relevance due to remote work opportunities and the like
Risks of D-cities
High vacancy and general investment risk
Lower value development
Low move-in rates, smaller (to shrinking) populations
Less certainty/plannability than in A-, B-, and C-cities, more research required
Success strongly dependent on individual property
What you can remember
As you can see, there are opportunities and risks in all categories. The rough (!) rule of thumb you can keep in mind when studying the macro factors:
The more popular and more significant the city, the ...
higher the purchase prices and the value development potential
lower the vacancy risk
lower the yield and cash flow potential
How to choose the right macro-location
So what does that mean? Which city or region suits you best depends on what you value more and what you can afford: If you have a high need for security and you'd like to sell your home profitably, some A- or B-cities will be of interest to you. If you can or want to spend less money, are more willing to take risks (e.g., because you are gambling that demand will increase due to digitization or other factors), and the positive cash flow potential is most important to you, you can also look at C- or D-cities. But there, your property should also be selected all the more carefully.
Another fantastic tool for analyzing the macro-location is the Prognos Zukunftsatlas®. Every three years, it explores which German cities and metropolitan areas are best equipped for the future. Especially if you want to take a closer look at the potential of some C and D cities, it's worth checking out.
Scout the neighborhood: the micro-location
Okay, you've picked a city. Then you can go ahead and buy real estate right away, right? Wait, not so fast. Once you've found one or more properties in a city or region that appeal to you, the next step in the location analysis is one you shouldn't skip: evaluating the neighborhood, aka the micro-location. It's vital to take a close look at your property's immediate surroundings. After all, the area is crucial to you as a buyer but also a decisive criterion for potential tenants. A property is useless if you can't find people who want to move in because the area has nothing to offer.
Here's what matters:
Proximity to public transportation
Proximity to supermarkets, other stores for daily needs, and doctors
Proximity to daycare centers and schools
Cultural offerings such as cafés, theaters, cinemas, bars & restaurants
Noise level (flight paths, construction sites, busy streets, nightlife)
Composition of the neighborhood (families, seniors, students, etc.)
Orientation/location of the property (e.g., for light, privacy, views, noise)
Once you've examined these location factors, you can compare the potential of different properties in a city or region much easier.
Does the property suit the area – and you?
Think about the people you want to have in your apartment and your investment goal. For example, 3-bedroom apartments in family-friendly neighborhoods are a good fit if you're looking for long-term tenants. If you want to increase your rental yield, 1-bedroom apartments in student neighborhoods might be a better choice.
But how do you actually find out this information without traveling to the area yourself? It may sound stupid, but for some things, it's enough to type the address into Google Street View. For other factors, it's more complicated.
By the way, this also annoyed us when we were buying real estate. That's why we created our District Guides. These videos give you an insight into different parts of the city and explain what makes the area unique and awaits you there. Check them out.
Urbyo is on the lookout
With the macro-location and micro-location factors in mind, you can be more targeted in your property search. However, without proper support or sufficient experience, the location analysis and real estate purchase can still be tedious. But don't worry: You can simply choose a property on our platform.
At Urbyo, we offer a lot of suitable investment properties. Our property evaluation goes beyond the location analysis, too. We also look at the HOA meeting minutes, the purchase price, existing leases, other relevant documents, and the general condition of the properties.
None of this information is kept secret: You'll always find the most critical data in the detailed view of each property, including photos, videos, and 3D tours. And for the impatient audiophiles, we have helpful audio clips that highlight the most important aspects. So even as an absolute newbie, you can invest in exciting properties. Nice!
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