The good times continue to roll on. Inventory is down and prices are stabilizing and…
In rapidly increasing markets, everyone is an expert! Unfortunately, the real estate investments market is transitioning and there will be winners and losers. Everyone always touts location, location, location to pick winning properties/areas? Is this the only metric we should be looking at? What other key metric can you use to determine winners and losers in the new real estate paradigm?
How does Location impact Colorado Real Estate?
Everyone has heard the adage that to pick winning real estate focus on three items: location, location, location. Although location is by far one of the most important drivers of real estate values, it is oversimplified. Although a property might have a great location, that doesn’t mean that the property is a slam dunk for appreciation.
How does the price point of the property impact Colorado Real estate?
A property could have the best location, but not be a good investment. For example, let’s say there is a 2 million dollar house in the Denver metropolitan area. Just because the house is in a good neighborhood in Denver, does not mean that the house is a good property to buy. The price point of a property is also a key metric.
In our current environment, real estate prices have shot up double digits year over year due to low interest rates. Currently, interest rates have more than doubled since last year with the average 30 year fixed 5.25%. With such a large increase in rates, housing costs have also increased exponentially.
How do Rising Interest Rates impact Colorado Real Estate?
Here is a quick example of what the increased rates look like in Denver vs other cities and from the average to a higher price point.
|Average||2.5% rate||5.25% rate||6.25%||2022 increase||2023 increase|
|Salt Lake City||$ 575,000||$2,347.39||$3,175.17||$3,540.37||$827.78||$1,192.99|
|** 35% increase||** 51% increase|
|Denver high end||$ 1,200,000||$4,898.89||$6,626.44||$7,388.61||$1,727.55||$2,489.71|
Notice that the 1.2m dollar house with a 2.5% rate is comparable to a 725k house with a 6% rate (where rates are heading next). Unfortunately, salaries are not increasing 35% and especially not 51% as rates go even higher. Increasing rates make price point even more important in selecting winners and losers.
What are the Riskiest areas in Colorado Real Estate?
- Denver: The Denver market overall is a good market, but the riskiest areas are in the 750k-1.5m price point. This is where rising rates are going to sting the hardest. Above this amount, buyers are making substantially more money and therefore not as impacted percentage wise on mortgage payments
- Pueblo: The main driver of Pueblo real estate is that it is cheaper than other options; unfortunately, this does not build a long term housing market, as soon as other options moderate in price, Pueblo will fall hard.
- Delta/Montrose: are a little similar to Pueblo, in that the largest driver of the market is that they are a low cost alternative. The average home price in Montrose is now 415,000. The median salary is 54,000 (after taxes take home pay would be around 43k) The monthly mortgage payment would be 2600 (including taxes and insurance). Housing would be 60% of the median wage in the area. When calculating mortgage payments the rule of thumb is that housing should be around 28% of your income. The numbers don’t work for income in the area to justify the prices. There are many markets throughout Colorado that are smaller markets that don’t have the employment base to justify the house prices. Currently remote work is driving some of this, but as companies transition back to hybrid or back in the office this model breaks.
- Rural areas/ Exurban areas: We saw a flight out of urban/suburban areas to rural areas. Unfortunately, this trend is not sustainable as workers migrate closer back to work, school, amenities, etc… This trend will quickly reverse in the next correction.
What are the safest areas to invest in Colorado Real Estate?
Although there are some risky areas/price points, there are still areas that should outperform others in the next cycle
- Denver metro under 500k: There is a high demand at this price point as it is “affordable” for many workers in the area. Even when there is a downturn, the lower cost options will outperform
- Northern Markets under 400k: The Northern Markets like Fort Collins will do well at lower price points. There are many businesses that have relocated to the area which should keep the economy healthy. Furthermore, CSU is a major university that will continue attracting people to the area.
- Mountain towns: Although, the price points in the various resort communities for single family are very high they will not be impacted the same as Denver. In many ski towns 60-75% of the homes are bought in cash so these buyers are not directly rate sensitive. Furthermore, there will be a desire to buy into the various ski towns as a hedge against inflation as other assets lose substantial value (Stocks and Bonds have both lost value this year). Furthermore, build costs will make it prohibitive to materially increase supply.
The easy money days of the past are gone in Colorado. Real estate is in a transition period as higher rates and inflation take a toll and it will be much more difficult to profit in real estate. As in any cycle there will be winners and losers. Location alone will not define your real estate return; the property price in relation to the market will also be a key factor. To excel in the next cycle, focus on the lower price points in good areas in Denver and the Northern markets and on the relative lower price points in resort markets (for example under 1.5m in Frisco or Steamboat). Now is the time to be a bit more selective in real estate as not everything will go up going forward.
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Written by Glen Weinberg, Owner Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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