Among the four types of diversification, I find that this one is the easiest for newer investors to understand. Before passive investing, I was 100% geographically allocated to Colorado. I was even further concentrated just in Denver and in Colorado Springs.
Then, in 2023 alone, the Colorado Legislature passed nine new laws that all favored the tenant and were not in the interest of the landlord, that have made investing in Colorado extremely difficult.
For example, tenants now have a right of first refusal to renew their lease. If you are an active investor – have you ever had a problem tenant? Perhaps they usually paid late, created a lot of wear and tear on the unit, were loud, messy and/or annoyed the other nice tenants in the building? And I know you’ve had some tenants that checked ALL these boxes. Me too! I couldn’t wait for their lease to expire so I could find a better tenant. Now I can’t make that decision! The tenant decides if they want to renew, not me.
There are several more bills that passed in 2024 like this one. Colorado has gone from an investor-neutral to an investor-hostile state in three short years. If I still had all my investment in Colorado alone, I’d be facing a significant increase in business risk, not to mention more grey hair and lower returns on my investment.
This change in the regulatory environment can happen at any time, anywhere. If you can spread out the geographic footprint of your portfolio, you can greatly reduce your exposure to these shifts.
Currently, we focus on the sunbelt states. Why? They have the most population growth and reasonable real estate policies.
Population growth is the biggest driver of a local real estate market. Population is declining in Chicago, New York state, and parts of California. There isn’t demand for new homes or apartments. There’s a little less interest each year to buy a house, so there is no upward pressure on prices to drive appreciation.
Map source: Census Bureau.
On the other hand, markets with population growth need new development. The increase in population means more competition among consumers to buy a home or rent an apartment, which drives appreciation and cashflow growth.
Let’s look at the average home price appreciation from 1991-2023.
Map Source: FHFA | Federal Housing Finance Agency
States with strong population growth like Utah, Colorado, Arizona, Montana, and Florida all had appreciation that exceeded the US average of 297% from 1991 to 2023.
States with stagnant or declining population, like New York and Illinois, had below average appreciation. California is in the middle; it’s growing at a much slower pace. And California’s appreciation, as you might expect, is right about at the US average.
The pace of population relocations seems to be accelerating post-COVID. This could be a function of greater acceptance of remote work.
Source: US Census.
Another way to identify population movement is to monitor which states have the most in-bound U-Haul traffic.
Source: U-Haul.
All of these states are among what we consider our 15 top markets and where we want to diversify via geography!Click below to access the other pillars and if you are ready for passive, diversified investing…without the headaches, book your 15min investment review at https://irontoncapital.com/myreview to see if we can help you go passive.
