Sixty percent of U.S. markets saw an improvement in home affordability in quarter three of 2017. Colorado was not one of those markets. Denver County in Colorado has one of the lowest affordability indexes in the United States, and the rest of the state isn’t far behind. In fact, it’s getting so bad that lots of people simply cannot afford to live in the state.
On the surface, the problem is perplexing. There’s a housing shortage and rents have risen to record rates. That would make sense for a metropolis like San Francisco or New York, but it’s out of place in Colorado.
That’s why a recent report by Freddie Mac was so shocking when it came out. The report found that affordable housing for those who make less than half of the median income in Colorado dropped by over 75 percent between the years of 2010 and 2016. With rents that sit at 12.6 percent above the national average, it’s no wonder people have trouble finding place to live in Colorado.
This has left many people asking, “What’s wrong with Colorado?”
Although the problem might be perplexing on the surface, it makes more sense when you dig a little bit deeper. That’s when you realize this problem has been a long time in the making, and it might take even longer to fix it.
The Beginning of a Crisis
Like so many places in the United States, Colorado’s problems can be traced back to the recession. Many states built too many homes leading up to the recession and then had to deal with numerous foreclosures.
Colorado wasn’t as guilty of overbuilding as some other states were, but it did suffer through countless foreclosures.
Those foreclosures created an opportunity for investors. They swooped over to Colorado, bought up as many foreclosures as they could, and flipped them. Suddenly, those foreclosures were high-end rentals that drove up the average price of rent.
That was only part of the problem. The state also saw an influx of residents during that time. Around 570,000 people came to the state between 2009 and 2016, and many of them had money to spend. They came to fill well-paid jobs in the tech and oil industries, and they wanted to buy homes that matched their bank accounts.
This is where things took an ugly turn. There weren’t enough homes available for purchase in Colorado, at least not the type of homes the new residents wanted. At the same time, it was more difficult to buy homes than ever before. Developers were afraid to build new homes, just as banks were wary to lend money because they had just made it through the crisis. They didn’t want to end up with more bad loans on the books, so they turned many people down.
A compromise of sorts was made. Developers built some units geared toward high-income tenants. These luxury apartments ended up overwhelming the state. There were too many of them, and that led to a demand for affordable housing. People simply couldn’t afford to live in the units that were available.
Lack of Construction Workers
Colorado has another problem, as well. When those hundreds of thousands of people migrated to Colorado, they forgot to bring some construction workers along with them. Now, there is a need for construction workers, but there aren’t enough people stepping up to fill those spots.
This has caused construction wages to go up, but the wages haven’t gone up enough to make the state affordable for the workers. At the same time, there has been a crackdown on immigrants, and that’s caused much of Colorado’s construction workforce to flee the area. Now, there isn’t enough housing, and there aren’t enough people to build any more. Talk about a conundrum.
But it gets worse.
Laws and Regulations
Regulations and real estate go hand in hand, but with Colorado’s focus on nature, those regulations are even stricter than they are in other areas. The state has height restrictions in place, so buildings don’t obstruct mountain views. That makes it difficult to build properties to fit lots of people. That means it’s going to be difficult to fix the housing shortage anytime soon.
To make things even worse, the state has made it harder to sue developers for poor construction. Banks don’t want to back poorly constructed developments, so they aren’t granting as many loans for buildings targeted toward low-income buyers and renters. This has created a perfect storm of sorts.
That storm only gets worse when you consider that Colorado doesn’t have regulations in place to protect against cost increases. Metropolises like New York and San Francisco have learned from previous mistakes, and they put systems in place to deal with price issues. For instance, these cities rely on rent stabilization to control rent prices and government funding to construct low-income housing.
Colorado seems to be going in the opposite direction. Local rent control regulations are prohibited, and residential property taxes are capped. That cap means it’s hard to raise money for affordable housing. This has made it difficult to get out of the current situation.
Trying to Right the Ship
The state might not be taking steps to fix the crisis, but individual cities have. Denver is leading the pack when it comes to righting the ship. Denver’s Dedicated Affordable Housing Fund is the biggest step taken so far. The fund gets revenue through property taxes and a one-time fee for new developments. It is expected to raise $150 million in 10 years. That will allow it to create or preserve 6,000 affordable homes. That will put a big dent in the housing crisis, but it will not fix it. Also, it will only help the people of Denver. It won’t impact people who live in other cities.
What This Means for Landlords
Landlords are in an interesting situation in Colorado. On one hand, demand is high, so you can fill your rentals. On the other hand, it’s hard for people to pay for the rentals because the rents are higher than they should be.
That means landlords must protect themselves like never before. If you’re renting property in Colorado, be sure to follow these tips.
Find the Best Tenants
You can usually tell a lot about people by digging into their past. A bad credit score indicates a person is likely to get behind on his or her bills, while a history of evictions indicate that a person is unlikely to follow the rules of the lease. Find out what kind of person a prospective tenant is by running a tenant background check and tenant credit report.
Also, check a person’s references. Have tenants provide you with information from previous landlords. If the person checks out, you know he or she will likely be a good tenant, even in a difficult rental climate.
Get an Adequate Deposit
You have to assume that your tenants might skip out on you when the price of rent is high. That means you need to protect yourself by getting an adequate deposit. The deposit will cover any damages to the property, but it should also cover your losses if the tenant skips out on you.
There is not a limit to the amount of a security deposit you can collect in Colorado, and you are allowed to deduct:
- Unpaid Rent
- Utility Bills
- Fees Related to Abandoning the Property
You want to charge enough to cover your losses, but don’t overdo it. If your security deposit is too high, people will look elsewhere.
Set a Fair Rent Price
In a market with skyrocketing rents, it’s normal to want to reach a new high. However, you’re going to have a hard time finding tenants if you charge too much. Even if you do find tenants, you’ll have a difficult time keeping them. You want to find and keep quality tenants, so charge a fair price. Check out other prices in the area, and see how your property measures up. Then, set the price accordingly. You don’t have to cut yourself short, but be fair to the tenants. That’s the best way to build long-lasting relationship with your tenants.
Encourage Tenants to Get Renters’ Insurance
Tenants don’t tend to have a lot of extra money in Colorado. The rents are already so high that if something goes wrong, they might have trouble recovering. That means they might not be able to make rent if they’re robbed or if a visitor sues them. Make sure your tenants can meet their obligations by encouraging them to get renters’ insurance. Renters’ insurance is inexpensive, and it covers them in case anything happens to their belongings. It also protects them from lawsuits. That way, if something happens, they’ll get a payout from the insurance company and they can afford to continue living in the property.
Make Your Property Attractive
Most landlords charge a high amount of rent in Colorado. Your rent might be high, but you can entice renters by giving reasons you stand out. One option is to let potential renters know how easy you make the experience for renters. For instance, consider offering an online rent collection service. Most tenants like the idea of paying their rent online so they don’t have to go to the trouble of writing and mailing checks. You can also use a tenant portal to lure potential tenants to your property. Tenants can make maintenance requests through the portal so they don’t have to call and wait on hold to make requests. They can also communicate with you easily through the portal. This is an excellent way to lure younger renters who rely heavily on technology. In fact, offering these types of services will make you stand out ahead of many of your competitors.
Follow Proper Eviction Protocol
Each state has its own eviction process. If you need to evict a tenant in Colorado, you need to follow the state’s protocol.
First, make sure you have cause to evict. In Colorado, you can evict a tenant for:
- Failure to pay rent
- Violating the rental agreement
- Committing a serious criminal act, such as violence or drug use
In all cases, you must give the tenant a three-day eviction notice. If the tenant has failed to pay rent or violated the rental agreement, he or she has three days to fix the issue. If the issue is fixed, the tenant may remain on the property. If the tenant has committed a serious act, he or she does not get the chance to fix the problem. The person must vacate the property in three days.
If the tenant fails to fix the problem or vacate the property within three days, you need to file an eviction lawsuit.
What if you want to evict someone but you don’t have cause? If that’s the case, you have to wait until the rental agreement expires.
If you have a month-to-month agreement, you must give the tenant a seven-day notice. If the tenant fails to vacate the property after seven days, you will need to file an eviction lawsuit.
If your tenant has a fixed-term lease, you don’t have to give the tenant a notice. Just do not renew the lease. The only exception of this is if your tenant contract states that notice must be given if the lease isn’t subject to renewal.
Is the Colorado Real Estate Market Right for You?
Jumping into the Colorado real estate market might be a frightening proposition right now, but if you protect yourself, you can make money. The key is to be careful when you move forward. Screen all potential tenants, and choose someone who is likely to pay the rent on time and take care of the property. Add extra protection, such as renters’ insurance, into the mix, and you will be all set.
Of course, if you think Colorado sounds too risky, there are countless other markets out there, just waiting for investors. Keep your eyes open, and you will find the perfect place to invest your real estate dollars. Then, you can make your money work for you.