Local Market Monitor, Inc.Growth Lessons For Real Estate Investments In The Desert States
The modern West isn’t really that different. Growth is no longer limited by local food production, but the harsh climate – too hot or too cold but always too dry – still concentrates population in a few large centers where demand for housing can change from high to low in the blink of an eye.
For real estate investors, this easy cyclicality is both good and bad. If you have a long-term perspective you can always expect things to get better; but if you want short-term gains you need to know exactly where in the cycle you are right now. As in other parts of the country, local markets lend themselves best to several different investment strategies.
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High Ratio Markets
That is, a high ratio of home prices to rents. In these markets, like Denver, Boulder, Santa Fe and Fort Collins, the difference between home prices and rents is so great that investments in straight single-family homes is difficult. You can always do it, because there will always be some people who prefer to rent a single-family home even though they can afford to buy one – buying would actually be cheaper – but there aren’t very many of them, especially at the upper end of the rental range. Renting at the lower end is a specialty you want to stay away from. Be sure you aim for a rent that will give you a good return even if your property stays empty for a few months between renters.
In high-ratio markets your best bet is to subdivide a large single-family property into several rental units. Location is key here, because Westerns markets usually are sprawled over a large land area – a location in the middle of nowhere won’t attract as many renters as one near a hospital, university, or town center.
For short-term investors (a five year horizon?), it’s important to compare home prices to what the average local income can buy – the “income” price. In Boulder and Denver, for example, home prices now are more than twenty percent higher than the income price. These markets are almost over-priced, and that can mean that prices will surge for a few years and then stall – or continue upwards like a runaway train and then plummet; in either case, the risk of an eventual fall in home prices is high and you want to be out before that happens. If you invest now, you have a good opportunity for a strong increase in the value of your property, but you must have an exit plan.
Source: forbes.com
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