Rachel Brand bought this Aurora home, which already is cash flowing.

Rachel Brand bought a house in Aurora as an investment in February and had it rented by mid-March.

It’s already cash flowing, with the monthly rent about $540 a month more than the mortgage amount.

Brand, principal of Brand Communications, bought the home, which is a pleasant walk from the Anschutz Medical Campus, because she wanted an investment with a steady return.

“I think you get more consistent returns with real estate than in the stock market, and real estate gives you higher returns than other fixed-income investments,” Brand said. “And, if you think just about the big picture, there is a tremendous numbers of homes on the market right now at really good prices. For people with good credit and cash, it can be a good opportunity.”

Record-low vacancy rates

Brand bought a rental home at a time when the Denver-area housing rental market has never been tighter.

As previously reported by InsideRealEstateNews, the overall vacancy rate for rental homes in the Denver area is a record-low 1.4 percent. In the Broomfield/Boulder corridor, the vacancy rate is zero.

“It really doesn’t matter if rental vacancy rates fall even lower,” said Ryan McMaken, spokesman for the Colorado Division of Housing. “It if falls to 0.5 percent, it really isn’t going to represent a significant difference for the market. If one out of 50 units on the market is empty –  that is really nothing.”

The number of days on the market has dropped to 29.7 days from 45.1 in the first quarter of 2010. “That’s not an insignificant drop,” McMaken said. “That’s a 34 percent drop.  The interesting thing will see if the days on market continues to drop.”

Overall, monthly rental rates hare remained flat, in large part because more homes are entering the market that is helping to offset the demand. Some of the rental inventory is coming from can’t sell their houses, so they are renting them to reduce the size of a monthly hit on their pocketbooks. Gordon Von Stroh, the University of Denver business professor who researches and authors rental reports for the housing division, also has raised the issue that to a certain extent landlords may be limited on how much more they can raise rents, simply because renters do not have the income to pay rents as high as normally would be associated with such low vacancy rates.

The rental inventory also is growing from investors purchasing distressed properties, often at huge discounts from the previous sale prices. Those properties include foreclosures and short sales. A short sale is when a bank accepts less then the mortgage amount.

“The foreclosure crisis is a factory spitting out renters,” said Jim Flint, principal of A Better Way Realty. In addition to providing real estate services, Flint hosts workshops for people wishing to learn how to invest in income-producing real estate.

New era for rental market

Flint, who has been investing in real estate since 1971 when he was a student at the University of Denver, said he has never experienced a rental housing market like this one. He said it is most like the housing crash in Denver in the late 1980s, with some significant differences.

First, he doesn’t think home rental vacancies every fell to 1.4 percent, but more likely were around 3 or 4 percent two decades ago.

“In the late ‘80s, interest rates were on the way down, and we were starting to get new jobs and people were moving here from California,” Flint said. “Now, rates are stalled and lower than they have ever been. But we have no jobs, and no housing market to speak of. So you might as well be a landlord. And homes are cash-flowing from the beginning, which is very unusual.”

Brand, who bought the home in Aurora, has another reason why she chose real estate instead of equities.

“I knew the home needed some repairs. It needed some love,” Brand said. “I’d rather put the money into the Denver economy by hiring plumbers and carpenters and electricians, than feathering the nest of some people on Wall Street.”

Contact John Rebchook at JRCHOOK@gmail.com

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Demand for statewide rental housing is not only driving down vacancy rates, but also is increasing rental rates, shows the report by the Colorado Division of Housing.

The five metropolitan areas tracked in the survey all showed vacancy rate declines. The largest drop in the vacancy rate was found in Grand Junction where, year-over-year, the rate fell 45 percent from 11.6 percent to 6.3 percent. Vacancy rates in Greeley and the Pueblo area, respectively, fell by 44 percent and 41 percent. Vacancy rates in Greeley and Colorado Springs are both now at nine-year lows.

The metro Denver vacancy rate, measured earlier this month in a separate survey, also fell year-over-year from 6.5 percent to 5.5 percent.

Although Grand Junction showed the biggest percentage drop, it had the second-highest vacancy rate.

Vacancy rates in the other four areas were:

• Colorado Springs, 5.8 percent.
• Fort Collins/Loveland, 4.0 percent.
• Greeley, 3.8 percent.
• Pueblo, 7.4 percent.

As vacancy rates fell, average rents strengthened in several markets. From the first quarter of 2010 to the first quarter of 2011, average rents increased in Colorado Springs, Fort Collins-Loveland and Pueblo. The average rent fell nearly one percent in Grand Junction, while the average rent was flat in Greeley. Rents grew the most in the Fort Collins-Loveland region where the average rent increased 7.5 percent year-over-year from $837 to $901 during the first quarter. The average rent grew 3.8 percent in the Colorado Springs area and 4.2 percent in the Pueblo area.

Average rents in all metropolitan areas measured were:

• Colorado Springs, $737.
• Fort Collins/Loveland, $901
• Grand Junction, $656.
• Greeley, $660.
• Pueblo, $570.

The metro Denver average rent, measured in a separate survey, grew 3.8 percent year-over-year, and was $911 during the first quarter.

The statewide report is available online at the Division of Housing website: http://dola.colorado.gov/cd

Contact John Rebchook at JRCHOOK@gmail.com

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It also is taking longer to find tenants for homes. The number of days on the market for single-family rentals and similar properties increased from 45 days during the fourth quarter of 2008 to 53 days during the fourth quarter of 2009. Detached single-family rentals in particular faced a two-year high of 62 days.

Federal tax credits turning renters into buyers

“There is no one economic factor behind the increase, but some of the people that had been in single-family have purchased homes to take advantage of the tax credit,” said Gordon Von Stroh, Professor of business at the University of Denver, and the report’s author. “But the unemployment rate remains above last year’s rates, and that will tend to keep vacancies up.”

The tax incentives to buyers “is the other element,” causing fewer people to buy homes, but it not as great of force as it was last fall. The big rush is over,” said Robert Alldredge, principal of Jericho Properties. “Last year, when they thought the credits would expire in November, we saw a big rush of people leaving rental homes to buy houses,” he said. “And those were our most-qualified renters. They were sort of the cream of the crop. But we have not seen as much of that this year. It’s just too hard to qualify for a loan. I think a lot of the renters who were qualified to buy, already have taken advantage of the program.”

The  $8,000 tax credit for first-time home buyers, which requires a home to be under contract by April 30, and closed by the end of June, is not attracting buyers to condos and townhomes, for the most part, he said. There also is a $6,500 tax credit available for qualified homeowners, some of whom may want to sell their home and buy a smaller one, as well as move up.

“The tax credit incentive is driving more toward single-family homes and less than condos and townhomes,” Alldredge said. “People want house and if the government going to give you a hand out, some people will take it, if they can qualify for a loan.’

Susan Melton, the broker/owner of Assured Management in Lakewood, agreed with Alldredge.

“A majority of the good tenants who are taking advantage of the tax credit, want to move into a single-family home, and not a condo or a townhome,” she said. “It had a big impact on us at the end of last year, but we have not seen very much activity so far this year. I think the majority of people who qualified for the program have already taken advantage of it.”

Single-family homes rule as rentals

Single-family detached homes also are more attractive to renters, Von Stroh said.

“The overall vacancy rate has run up to 5.5 percent,” Von Stroh said. “But when you start looking specifically at the data, single-family home rental vacancy rates are about the same,” Von Stroh said. “A year ago, single-family home vacancies were at 4.5 percent and now they are at 4.7 percent. But condo rentals were at 4.5 percent and are now at 6.1 percent. And duplexes were at 4.4 percent, and are now at 7.7 percent.”

Melton  said one reason for that is because if a family loses its homes in foreclosure, it wants to remain in a rental house, and not a condo or a townhome. ”If you look at the units with five bedrooms or more, there is a zero vacancy rate,” Melton noted. “One-bedroom units have the highest vacancy rates.”

The metro-wide jump in vacancies in single-family rentals and similar properties was driven by increasing vacancies in Denver County and Arapahoe County where vacancy rates were at 6.8 percent and 5.7 percent respectively. Vacancy rates fell in Adams County and Douglas County. Rates were flat in Jefferson County and in the Boulder/Broomfield area.

Vacancy rates for all counties surveyed were: Adams, 4.1 percent; Arapahoe, 5.7 percent; Boulder/Broomfield, 3.8 percent; Denver, 6.8 percent; Douglas, 3.0 percent; and Jefferson, 4.7 percent.

Rents still rising

In spite of rising vacancy rates, average rents continued to climb.

The average rent for single-family and similar properties rose to $1016.77 during 2009’s fourth quarter, rising from 2008’s fourth quarter rate of $995.24. 2009’s fourth quarter’s average rent is the highest average rent yet recorded for the fourth quarter.

“The fact that average rents continue to rise shows that renter demand for these properties remains relatively high in spite of a soft overall rental market and poor job growth,” said Ryan McMaken, a spokesperson for the Colorado Division of housing. “Owners can afford to raise rents a little since many people still prefer the roominess of a single-family home to an apartment, but today, fewer people view buying a single-family home as the fail-safe purchase that they once did.”

Average rents for all counties were: Adams, $1024.79; Arapahoe, $995.23; Boulder/Broomfield, $1631.30; Denver, $952.27; Douglas, $1372.91; and Jefferson, $974.90.

It’s the mix

But Melton isn’t seeing rental rates rising.

“If you look over the last 10 years, the overall rental rates have not increased that much,” she said. “Part of the reason rates are up has to do with newer, bigger units entering the rental market from people who either can’t sell their houses or want to wait until they can get a better price. These homes are not only bigger, but have less wear and tear than a home that has been in the rental pool for the past 20 years, so they get a higher price. But overall, I would say rents are flat.”

The Colorado Statewide Vacancy and Rent Study is released each quarter by the Colorado Division of Housing. The report is available online at the this link.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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Among large metropolitan areas, Fort Collins and Loveland reported the lowest vacancy rates at 6.3 percent and 6.6 percent, respectively.  All other metro areas measured in the survey reported vacancy rates above 7 percent. In Pueblo, rates rose from 7.2 percent to 12.2 percent year over year, while they rose from 3.1 percent to 13.2 percent in Grand Junction during the same period.

Third quarter vacancies in the metro Denver area, measured in a separate survey last month, were at 7.7 percent.

Vacancy rates in all metropolitan areas were Colorado Springs, 8.7 percent; Ft. Collins/Loveland, 6.3 percent; Grand Junction, 13.2 percent; Greeley, 7.4 percent; Pueblo, 12.2 percent.

Economies differ

“Grand Junction is certainly the area that really attracts attention in this report, and it highlights just how diverse the local economies in Colorado are,” said Gordon Von Stroh, professor of business at the University of Denver, and the report’s author. “In Grand Junction, vacancies have basically tripled, but they’re down in Colorado Springs, and they’re up by about 70 percent in Pueblo. Employment and housing supply are really making a difference in different regions of the state right now.”

In general, a vacancy rate of 5 percent is considered to be the “equilibrium rate.”

Rents mixed

Average rent levels were also mixed across the state. As expected, average rents fell in Grand Junction in response to rising vacancies year over year, but remained flat in Colorado Springs in spite of falling vacancies. The biggest increase was seen in the Ft. Collins/Loveland region where average rents increased by over 40 dollars from the fourth quarter of 2008 to the fourth quarter of 2009.

Average rents in the Ft. Collins/Loveland area rose year over year from $809.81 to $854.10, and fell from $666.22 to $633.46 in Grand Junction during the same period. In spite of a rising vacancy rate, average rents rose in Pueblo from $518.26 to $541.44 year-over-year.

Average rents in all metropolitan areas measured were Colorado Springs, $711.66, Ft. Collins/Loveland, $854.10; Grand Junction, $633.46; Greeley, $636.86; Pueblo, $541.44.

The Vacancy and Rent Surveys are a service provided by the Colorado Division of Housing to renters and the multi-family housing industry on a quarterly basis. The Colorado Vacancy and Rent Survey reports averages and, as a result, there are often differences in rental and vacancy rates by size, location, age of building, and apartment type. The report is available online at this link.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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