For five years, markets in Utah and Colorado have had strong economic growth and strong in-migration. The population increased 9 percent in Utah, the highest rate in the country, 8 percent in Colorado, putting upward pressure on housing. In the last three years home prices rose 25 percent in Utah, 35 percent in Colorado.
Does this mean the best years are over? Can investors still get a good deal in these growth markets? In a way Utah and Colorado are a metaphor for all real estate investing – what’s the best investment strategy once a market has already been successful?
Note that these aren’t small boom-and-bust markets that you might encounter in Florida or casino land or shale-oil country. The economic forces that made Utah and Colorado attractive in the first place will last for decades. This makes investing easier because you don’t need perfect timing to get in and out. Having said that, you still need to be careful with your investment because real estate cycles – fueled by rapid changes in demand for housing – can afflict markets where the economic situation is otherwise good.
Looking at the statistics, we can see that in both states the strongest growth is not in the dominant market but in the smaller ones. The populations of Salt Lake City and Denver grew at above-average rates in recent years, but those of Ogden, Provo, Fort Collins and Greeley even more. And a number of the smaller markets have the better job growth right now.
Combine this with the stats on home prices and we can see different investment strategies for the big and the smaller markets.
The trickiest investment in the area is in Denver, where home prices are already high and the market is over-priced 45 percent. At Local Market Monitor we forecast that Denver prices will rise another 30 percent over the next three years, but the risk that they will peak out and fall increases every year. Flipping properties isn’t a good idea because prices aren’t rising fast enough; single-family rentals won’t find a very large audience. The best strategy will be to invest in apartment buildings or to split single-family homes into multiple rental units – rents are more stable than home prices. For this type of investment, though, you must be very strict about the price you’re willing to pay; don’t factor a return from rising home prices into your analysis.
The risk in Denver is compounded by the recent slowing of local economic growth. Jobs in Denver increased more than 3 percent the previous year, only a modest 1.6 percent in 2017. This slowing isn’t necessarily bad for real estate – it can ease the upward pressure on home prices – but any further drop in growth would cut demand for the very rental units you plan to offer. The long-term outlook for rentals in Denver is very good, so don’t worry too much, but it’s more fun to invest if a market isn’t slowing right before your eyes.
The situation in Salt Lake City is similar but milder. The market is getting into over-priced territory but not yet very much. Jobs are still increasing at a good rate, though less than last year. And even though home prices are fairly high, the price/rent ratio is still low enough so that single-family homes can be rented out without being carved into units. Your investment options are larger.
Among the secondary markets, note that Fort Collins and Boulder are in over-priced territory, and that Pueblo and Grand Junction have had weak population and job growth. This doesn’t mean you shouldn’t invest there, just that there’s a higher-than-average risk that you should reflect in a higher return you require from your investment.
The best opportunities in 2018 may be in Provo and Greeley. Population growth has been strong, job growth remains high, homes are not over-priced. And you’ll probably find less competition there. I think splitting single-family homes into rental units is the best idea, but other options should work fine. The long-term prospects are very good, and so are the short-term ones. Good luck!
See original at: https://www.forbes.com/sites/ingowinzer/2018/03/14/can-real-estate-investors-still-find-a-good-deal-in-utah-and-colorado/#58ba1579122b