We’ve been so focused on talking about asset valuations increasing that we’ve been glossing over a very important component of rental property investing—rental rates. As we’ve mentioned previously, actual rents are coming in higher than the pro forma estimations for most of this year. So, I’ve compiled some data to see how Colorado Springs rent is changing.
- Listen to the podcast “#41: Analyzing Rent Trend Data for Colorado Springs on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Rents are Rising Everywhere
While real estate is local, it’s important to look at the US as a whole to see any systemic patterns. According to a July 19th article from Zillow Research, median rents nation-wide increased over 7% year over year. From May to June of this year alone, there was a 3.1% jump, and the median rental price for the country is currently $1800 a month. Even with its rising cost of living, Colorado Springs hasn’t yet hit $1800, which makes this median number all the more surprising.
Interestingly, while rents grew 7% year over year, housing prices grew 15%. Even though those are both high, housing costs are outpacing rents at a much faster rate. As I noted in The 2021 Guide to Colorado Real Estate Investing Strategies, rent rates have not been growing at the same rates as property values, which is something for investors to keep an eye on. What works now as a rental property if you bought today, may not work as a rental if you buy in the future at a higher price.
Since we don’t have any expectation of buying conditions getting better, I still suggest buying now if you see something that works. Buyers are able to take advantage of cheap debt because interest rates are still low, which will pay off in the long run. As the gap grows between rent growth and purchase price, it will be harder to cash flow.
Local Rent Trends in the Springs
The Gazette, a local newspaper for the Springs, recently ran an article about apartment rents in the area that matches the trend we’re seeing for the country. Record highs have been set in six of the last nine quarters, making soaring rents the norm.
A report on rents and vacancy rates for the first quarter shows that average rents for the Springs rose to $1,333.69 per month, up nearly $115 (9.4%) on a year over year basis. This is a little more than $57 higher than the previous record high of $1,276.64, which hit in the third quarter of 2020. This is a very steep increase in one year; our underwriting is typically at 3-4% growth per year.
For more context, here are the average rents broken down by unit type:
- Efficiencies: $1,035.74
- One bedroom, one bathroom: $1,208.80
- Two bedroom, two bathroom: $1,749.53
At some point, affordability is going to come into play. It’s important to consider that wages in the area are not increasing at these rates, making rents more burdensome on the tenant population. If living costs continue to increase at these rates, tenants won’t be able to afford them, which means this level of growth in rent rates is not sustainable.
Colorado Springs Vacancy Rates
Vacancy rates are known as the silent killer of rental profits. In the Springs, however, the vacancy rate across all apartments is 5%. Moreover, a study found that single family homes and smaller apartment buildings typically have an effective vacancy rate of 0%. In the Security-Widefield area, Realtor.com’s hottest zip code, the vacancy rate is 1%, which we can only assume is accounting for a week’s turnover between tenants.
This big spike in rent coupled with low vacancy points to a supply and demand issue. The Springs is growing in terms of population, but only 250 units were added to rental inventory in quarter one. Though we don’t have exact numbers, we know a lot more than 250 families moved into the area during that time.
There are a lot of articles about fancy high-rise apartments being built, but it will take a year or two for them to be done with construction. It will be interesting to see how the new buildings popping up along the skyline affect these numbers.
What does this mean for Colorado Springs landlords?
It’s important to be cognizant of market trends while also being mindful of your tenants. If you have tenant turnover and your unit allows for you to realize a higher rent rate, then that’s a good opportunity to take advantage of the rising rates. However, if you have a good tenant, don’t squeeze them in an attempt catch up to market rates. Look at and take into account how your costs are increasing, but do not put a significant surcharge on a lease renewal. At some point, this will level out or wages will have to rise to match these costs.
The articles referenced in this post can be found here:
To read our book, The 2021 Guide to Colorado Real Estate Investing Strategies, email us and we’d be happy to send you a copy.
If you’re interested in investing in the Springs, reach out to me and I can help you form a strategy and find the right property for you.