Head West: Study Shows Double-Digit Rental Returns in the Mountains

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HouseCanary’s quarterly Canary Rental Index (CRI) explores rent return across the country; we examine how rental yield varies from state to state by pinpointing the effective gross yield (EGY) that investors can expect on average in any given state and in certain markets. The EGY calculation includes rental expenses (like the price of the home and state and local tax levies), then determines what kind of return on investment a rental investor can expect given the local fair-market rental value of homes.

In our most recent CRI, we see that EGY across the country is hovering at 7.7%. Rental investors can therefore expect a return on their investment of around 7.7%. That’s a solid return, but as we can see when we dive into the Mountain West region of the country, returns tend to be higher when real estate prices are relatively low (though not always), and there are ripple effects spreading to nearby markets from hot real estate market centers exploding with buyer interest (like Denver).

Rocky Mountain High: Colorado

Colorado has seen a population explosion in the past couple of years, adding almost 100,000 new residents in 2016 and nearly 80,000 new residents in 2017. That influx of people has slowed in 2018, but population growth has still had a significant impact on Denver in particular—Colorado’s capital city and the destination for many newcomers to the state.

As a result, the home price growth in the Denver-Aurora-Lakewood metropolitan statistical area has been some of the fastest-paced growth in the country. Colorado as a whole showed an 8% increase in price growth year-over-year, and the results in the capitol MSA vary widely. For example, Franktown and Castle Rock to the south and Westminster to the north show the slowest current growth pace at 5.1%, but the 80218 ZIP code—spanning the North Capitol Hill/City Park West neighborhoods down through Cherry Creek and to Alamo Placita—experienced a whopping 11.8% price growth in the past year.

But that high price growth doesn’t necessarily translate into increased rental yield for investors. In the 80218 ZIP code, the average gross yield for rental investors is 5.8%. But the 80219 ZIP code, which encompasses the Barnum, Westwood, Mar Lee and Harvey Park neighborhoods, show a gross yield more in line with national averages at 7.7%. It’s important to remember that gross yield and EGY aren’t exactly comparable (EGY includes the expenses of state and local taxes), so even that relatively high-return area of Denver sits below the national average when you factor in property taxes.

You’ll find the highest gross yield in the Denver MSA in Limon on the Eastern plains—almost an hour outside of the city proper—which boasts an 11.3% gross yield for rental investors. Closer to the city center, investors would be well-advised to look at outlying suburbs like Thornton to the north. In between Denver and Boulder, Thornton is capitalizing on both “hot” markets by being somewhere in the middle. Its gross yield is 11.1%, the highest in the central metro area by at least 3 percentage points.

Colorado’s Front Range is home to several MSAs besides Denver, that said. From south to north, the Front Range encompasses Pueblo, Colorado Springs, Denver, Boulder, Fort Collins, and Greeley, stretching in a chain across the state. Are these metros seeing any effects of Denver’s red-hot market. And should investors be considering them more closely?

Absolutely! In Boulder, for example, price growth has been slower in Longmont and Lyons—but the only place in the central city where price growth has been slow is on property owned by the University of Colorado. Otherwise, Boulder has seen a collective price growth of 8.4% in the metro area during the past year, and in Central Boulder and North Boulder, that price growth is up to 9.6%. Those are also some of the worst places for investors to hope for relatively high returns: Central and North Boulder showed average gross yields of 4.4%, compared to a potential 6.8% gross yield in Longmont.

The best MSA to invest on the Front Range? Believe it or not, Pueblo, Colorado, has an average EGY of 15.5%—one of the highest yields in the country and more than double the 7.7% national average. This is one area where high price growth hasn’t seemed to hurt rental yields very much: Pueblo’s price growth over the past year ranges from 7.8% in its 81004 ZIP code, which straddles I-25 from Pueblo’s Mesa Junction neighborhood all the way down to Colorado City, up to 13.6% in the 81005 area, which encompasses neighborhoods from Aberdeen to South Pointe. But despite that robust price growth, the lowest average gross yield in Pueblo is a respectable 12.8% in Stone City and Pueblo West, up to 16.8% in Avondale to the east of the city.

Read our full Canary Rental Index, with details about Salt Lake City, Boise, Billings, and other Mountain West hotspots.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.