Private Real Estate Investment Data Analysis and Decision Making
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Private Real Estate Investment Data Analysis and Decision Making
Roger J. Brown, PhD
Why Location Matters
The Bid Rent Surface and Theory of
Rent Determination
If you do not rest on the good foundation of nature, you will
labor with little honor and less profit.
Leonardo da Vinci (1452–1519) quoted in Mathematics
for the Non-Mathematician (Kline, p. 204)
INTRODUCTION
One of the oldest cliche´s we hear is: ‘‘The three most important things in real
estate are location, location and location.’’ Most cliche´s become truisms for a
good reason. If the value of location is universally acknowledged, there may
be some strong underlying theory that can be represented mathematically.
That theory is found in the construction of a ‘‘bid rent curve.’’ The general
notion is that land users ‘‘bid’’ or ‘‘offer’’ to pay rent to land owners based
on the renters’ ability to efficiently use the land. Those who can use it
most efficiently offer to pay the highest rent. If value is based on income,
the highest land values should occur where users are willing to pay the
highest rent.
In this chapter we will:
Determine how the market allocates land between consumers.
Build a model that tells us who will locate where.
Compute the bid rent curve, the rate at which rents fall for a particular
use as one moves away from the center of the city.
Consider how the appropriate use of real estate data permits us to
confirm the actual shape of the rent gradient.
Reach conclusions about another commonly used term in real estate: the
path of progress.
Discuss how the use of data improves the location decision.
Roger J. Brown, PhD
Why Location Matters
The Bid Rent Surface and Theory of
Rent Determination
If you do not rest on the good foundation of nature, you will
labor with little honor and less profit.
Leonardo da Vinci (1452–1519) quoted in Mathematics
for the Non-Mathematician (Kline, p. 204)
INTRODUCTION
One of the oldest cliche´s we hear is: ‘‘The three most important things in real
estate are location, location and location.’’ Most cliche´s become truisms for a
good reason. If the value of location is universally acknowledged, there may
be some strong underlying theory that can be represented mathematically.
That theory is found in the construction of a ‘‘bid rent curve.’’ The general
notion is that land users ‘‘bid’’ or ‘‘offer’’ to pay rent to land owners based
on the renters’ ability to efficiently use the land. Those who can use it
most efficiently offer to pay the highest rent. If value is based on income,
the highest land values should occur where users are willing to pay the
highest rent.
In this chapter we will:
Determine how the market allocates land between consumers.
Build a model that tells us who will locate where.
Compute the bid rent curve, the rate at which rents fall for a particular
use as one moves away from the center of the city.
Consider how the appropriate use of real estate data permits us to
confirm the actual shape of the rent gradient.
Reach conclusions about another commonly used term in real estate: the
path of progress.
Discuss how the use of data improves the location decision.
