When is comes to picking a location I suggest going with what you know or inventing a whole new place all together. If you're simply faking it, your reader will know. I personally love setting my stories in Kansas City, Missouri and the cities/towns within it's metropolitan. It's my hometown and I love it. I still end up making up somethings, like street names, apartment complexes (both names and where they are located in the city), but typically I keep it real.
I like writing what I know. I love mentioning the Royals, Gates BBQ, The Plaza, Crowne Center, Hallmark, my fave radio station (96.5 the Buzz), and local beautiful parks (English Landing Park, Case Park, White Alloe Creek, Line Creek Park and Trail). I seriously love my town and everything that makes it unique.
I do, however, invent places sometimes. I have never been to New Zealand but if I have a character who happens to be from there, I research the area 100% but make up the name of a small town and sprinkle it with bits of my research to give it an authentic sound. I also make sure the name I make up isn't too similar to a real place.
The problem with writing about somewhere you have never been is that if you make glaring mistakes, your readers will notice and it will take them out of your story.
There is a TV show on ABCFamily called "Switched at Birth", it takes place in the Kansas City area, mostly in Mission Hills, KS. On the show there is a place called East Riverside and it's the dangerous part of town. In the real world there is no East Riverside, just Riverside and its not at all dangerous. This is why when you make up a name, you shouldn't pick one that is actually in the area. Honestly, I can't watch the show. Whenever they mention the horrible "East Riverside" I can't help but roll my eyes.
So, with location, it's best to write what you know. That doesn't mean you shouldn't write about London or Budapest, but make sure you do thorough research. Or book a flight and get good hands on research, I mean, why not? A story may just be hidden inside of you that won't come out until you visit it's birth place...
I have more to say on location and setting, but I will save that for another post and another day.