If you are looking for a new city to diversify your real estate investment portfolio, you should definitely think about Denver. Now is the right time to invest in Denver real estate.
Let’s look at the 6 reasons why you should buy an income property in the Denver real estate property now:
1. Diverse, Strong Economy
To begin with, Forbes ranked Denver as #1 among 401 metropolitan statistical areas in its List of the Best Places for Business and Careers for the year 2015. The Denver-Aurora-Lakewood metro area moved up from the 4th place in 2014 to head the list for the first time in the 17-year history of the ranking. The reason? Well, Denver with its surrounding metro area is attractive for business because of its diverse economy, highly educated labor force, and outdoor recreational activities. Traditionally, the oil and gas sector dominated the Denver economy, but things have been changing in recent years. The local economy is more and more driven by the universities, where the invested federal research money is driving a significant growth in the computer technology industry. At the moment, professional and business services is the new main sector, providing 18% of all employment.
So, Denver’s economy is not only diversifying but actually generating jobs for young, highly educated people. Job growth in recent years has been above the average nationwide. Companies more and more often choose to expand their operations or fully relocate to Denver. What does that mean for investing in Denver real estate? That there are more and more people, especially young professionals and their families, moving to Denver and looking for accommodation within the Denver real estate. This trend is likely to continue in the future, which is one – probably the most important – reason to buy an investment property in the Denver real estate market now.
2. Population Dynamics
The second reason why you should consider purchasing an income property in Denver is directly related to the first one. As we described above, a strong economy means accelerated population growth. As energy is no longer the main driver of the local economy, jobs and thus population growth in Denver do not depend heavily on the price of oil, so any fluctuations are not likely to cause major disturbances.
Because of the always-increasing job opportunities, recent population growth has been massive and is projected to remain above the average for the country. Everyone seems to be moving to the already populous Denver-Aurora-Lakewood metro area, which currently has a population of 2.8 million people (the 19th highest in the US) – millennials, hippies, boomers – making Denver one of the fastest growing cities in the US. Well, that’s definitely good news for anyone willing to consider the option of investing in the Denver real estate market.
3. Tourism Numbers
According to an article in The Denver Post, last year 16.4 million overnight tourists visited Denver, setting a new record for the tenth year in a row! That’s 1 million more people than in 2014. The corresponding 6% increase in the number of tourists is significantly higher than the national average of 2%. Furthermore, the number of overnight guests has increased by 52% since 2005, double the nationwide average. The bulk of Denver overnight guests are leisure travelers – 13.8 million. Of them, 7.7 million visited friends and family, while the remaining 6.1 million were marketable. This means that these over 6 million people could have gone anywhere else in the US or even beyond but chose to come to Denver.
These are the tourists whom investors in the Denver real estate market offering short-term rentals should try to capture because the other 7.7 million are most probably staying with friends and family. But still – 6.1 million is a lot of people, which translates into a potential for large profit for anyone willing to invest by purchasing an income property in the Denver real estate. In addition, of course, you also have 2.6 million overnight business trips, and not all of these working people were looking into fancy, expensive hotels. If that’s not enough to convince you to at least think about this option, you should hear that – the overnight tourists in Denver spent $1.51 billion on accommodation in 2015 only! That’s a lot of money, right?
4. Tourist Attractions
What Denver along with the surroundings is definitely rich in is outdoor recreational opportunities. That’s not only a major attractive force pulling young families who prefer outdoor lifestyle to move to Denver but also an important factor drawing day and overnight tourists. Some of the major outdoor attractions are:
- Denver Zoo
- Denver Botanic Gardens
- Rocky Mountain National Park
- Mount Evans
- Mount Sneffels including an annual marathon, the next being scheduled for 12 August 2017 (all of you interested in renting Airbnb in Denver should already put this date on your calendars)
In addition to the booming economy, these tourist attractions are also an important driver of the Denver real estate market as they make both traditional and Airbnb rentals profitable.
5. Airbnb Legislation
Coming straight from reasons #4 and 5 to invest in Denver real estate is the issue of Airbnb in Denver. After two years of community-wide discussions, this year the Denver City Council passed a law approving short-term rentals (essentially Airbnb) of a primary residence for less than 30 days, which was illegal before. The law is in effect as of 1 July 2016, but landlords have until 1 January 2017 to start complying.
This means that second homes and investment properties in Denver cannot be offered through Airbnb. The Denver City Council actually discussed this option but eventually did not include it in the law, however, leaving the possibility to expand the legislation later. Still, this new law should be considered a partial gain for the Denver real estate market as at least short-term rentals are now legal. Now every short-term rental of a primary home has to be registered through an online license application portal in addition to paying a $25 license and 10.75% lodger’s tax. Potential investors in the Denver real estate market should keep an eye on what will happen with the estimated 2,000 listings of short-term rentals in Denver on Airbnb and VRBO with regards to compliance rates.
The final and maybe most convincing reason why you should buy your (next) rental property in the Denver real estate market now is that prices are on the rise. The average sale price in Denver at the moment is $420,000, which is 35% higher than what it used to be four years ago. Last year only, Denver real estate prices went up by 14%. There are houses in Highland currently listed for $1 million or more. As an average listing in Denver gets several offers at the very same day, prices are expected to continue going up. Actually, some predict a rise as high as 35% in the next three years. Although many of the expensive properties get paid fully in cash, affordability is becoming more of an issue for the average local residents in terms of both renting and buying a home. People in Denver spend about 21% of their wages on mortgage payments, which is a higher proportion than in DC, let’s say.
Well, that’s not necessarily bad news for real estate investors. The fact that new homeowners have challenges paying their mortgage could actually be good for people looking to invest in Denver real estate as it means that many young individuals and families will prefer to rent rather than purchase a home at that point. Another piece of good news for investors is that rents will continue to go up after a record increase of 11.4% per year over the past three years. Meanwhile, interest rates as well as vacancy rates are at an almost record-low level. Nonetheless, prices for out-of-state real estate investors are still affordable. As The Colorado Real Estate Journal highlights, even Denver’s record-high sale price of $600 per square foot for the IMA Financial’s building is 70% less than the sale price for top office buildings in NYC, 40% less than in Washington, D.C. and San Francisco, and 10% less than in Chicago.
For the end, we’ve saved one interesting number. WalletHub, a Washington, D.C.-based financial analyst website, ranked the Denver real estate market 6th among 300 cities and towns nationwide in 2016. It is also ranked 2nd among large cities, after Austin, Texas. The metrics used for the ranking include: percentage of homes underwater, average number of days until a house is sold, percentage of homes selling for a gain, median home price appreciation, home sales turnover rate, rent-to-sale price ratio, foreclosure rate, mortgage delinquency rate, number of bank-held homes, vacancy rates, and building permit activity.
Some Quick Numbers from Mashvisor
- Median Property Price: $558,977
- Airbnb Rental Income: $3,473
- Traditional Rental Income: $2,539
- Airbnb CoC Return: 4.66%
- Traditional CoC Return: 2.77%
- Airbnb Cap Rate: 7.13%
- Traditional Cap Rate: 5.13%
In sum, now is the time to invest in the Denver real estate market. Tomorrow prices might be high, interest rates might be high, and inventories might be even lower. To go forward with your purchase of an income property in Denver, visit Mashvisor for metrics and analytics of hundreds of properties in the city.