location.domain.com will produce you a ranking little faster when compare with domain.com/location
If thats the case, it is only thanks to new website bonus. After some time you will end up where everyone is.location.domain.com will produce you a ranking little faster when compare with domain.com/location
With subdomain you create different SEO entity, while with subcategory you are building one big authority site.
Subdomain SEO is much better if you do Grey/Black Hat SEO, as in case something goes wrong you can just bail on it.
With subdirectory though, bailing after doing some darker SEO is quite difficult and it requires a lot of resources.
You can find lot of topics about your question. Considering what i understood from all I read (not tested), sub-domains rank a bit faster and even better.
Please let us know how this will go!