Property owners have a choice to own real estate based on the location and therefore the rules that govern the property. To be restricted on something one owns outright is in essence property right theft. Today, one of the world’s largest hotel-oriented companies is Airbnb ($ABNB). A game changer for many communities, large operators, and individual owners. The demand for the service gives traditional travel a price and value alternative. When communities restrict an owner’s right, property values suffer.
One American city that has attempted to find a reasonable balance for travelers and hosts is the City and County of Denver. At the start of 2024, Denver will require all landlords to register their rental properties regardless of duration. Detached homes along with high-rise condos are not spared. The misguided goal is to increase a rental tax base while restricting the unplanned and unexpected availability of residences. With labor shortages and supply costs rising, the city has incorrectly driven the price of housing up vs down in a housing market otherwise governed by natural supply and demand. The curse of the new rule for short-term rental property owners is the primary residence rule. In effect, a short-term unit can only be such if the host is present.
Exhibit A: The Spire Condominiums
This Central Business District highrise is a beautiful 42-story residential tower. Until recently, it was one of the last built as a “For Sale” property. Investors and owners acquired and later resold properties at the Spire successfully. As the building aged, so did its homeowner association. While recent improvements enhanced the desirability of all units, one driving value trap created by the association was an anti-short-term rental policy. Property owners lost earnings in their units by being forced to lease units for longer than 30 days.
Why does this matter? In basic numbers: earning $50,000 in 1 year on a thousand square feet vs $30,000 is a clear reason to be pro-property rights and pro-individual owner rights. The city similarly should have desired an almost 2 times increase in income reported on local filings of individual tax returns.
Both the HOA and the city have created a quality of ownership problem. The HOA, believing limited stories on wild parties and noisy guests, hindered the upside of their owners’ values from 2018 to 2023. A 1 Bed, 1 Bath unit purchased in 2018 for $430,000, is currently worth $460,000 in 2023. That same unit would have in 180 days given the owner an approximate $150 to $200 a night income. The HOA’s restrictive policy kept rental rates for 30 days or longer at $2200 to $2500 a month for a one-bedroom. Relying on a service like Airbnb would have further enhanced both the individual owner’s and the HOA’s ability to properly vet the general public interested in occupying the property amongst primary residence owners. AirBnB’s verified service performs vetting of public government-issued IDs for renters and tax reporting for the city with property owners. The individual owner gains clarity based on the tried and true social reviews of a possible renter. Compared to an old-style general listing on Craigslist or even an ad in a local paper, the digital renter is typically of a higher quality than that found without such services. The city and the HOA increased the risk of individual owners unnecessarily. If building units were at risk for foreclosure, the owner experiencing hardship could have eliminated the potential of foreclosure by quickly adding the property to a short-term marketplace. Without that private option, the owner is forced into an HOA discussion on rental hardship when otherwise the private dealings of one owner are not needed to become public prior to formal foreclosure notice.
Exhibit B: The Windsor Condominiums
Completed in 1981, The Windsor was a beneficiary of Denver’s original oil boom and considered a downtown luxury living destination. Today the HOA has proactively sought new improvements with a contemporary lobby and amenities. The current phase of building assessments is completed and younger residents have been focused on what the building offers: ideal location, individual units with various styles and conditions, and future income potential. Due to the assessments and the HOAs monthly dues, the market value of The Windsor has been buffeted by a favorable rental policy. Over 1 year, a unit owner with a 2 Bed 2 Bath home can average a nightly rate of $325. If used part-time, the income alone would be $58,500. Lenders should take note. While higher rates are making lenders compete, property owners are faced with market choices that can ensure their long-term investment prospects. This is especially true with a proactive homeowners association. Units to Consider: Unit 801 or Unit 808.
Exhibit C: The Denver Crane Watch
From the top of any highrise downtown, or while peering out on Denver’s skyline from Lohi’s El Five restaurant, cranes line the horizon. Most are for rent, multifamily properties. Most have small square-foot layouts targeted for an above-average rental market. Once completed, the primary funding sources anticipate a consistent rental income. One that has been forecasted and ideally will not be undermined by city ordinances or a shift from urban to suburban living. Denver’s Central Business District has suffered from aging buildings and the work-from-home post-COVID environment. The hollowing out of the city’s core has made up to 16 traditional office buildings ideal candidates for conversion to residences. With a restrictive primary residence policy, the City and County of Denver have favored large ownership groups over individual property owners. These owners have options like their bigger investor class. Crime, homelessness, and congestion prevent urban renewal from gaining traction. With restrictions by HOA communities, urban flight is bound to happen. Indeed Denver’s suburban market remains tight although away from the original residential reason to be downtown: cultural vibrancy, entertainment, and efficient transportation access.
The Denver Advantage:
For primary residents seeking an option to have rental income, Denver remains a quality choice. If in the City and County of Denver, primary residents have to be mindful of local restrictions combined with fluid rules at the City. Without viable solutions nationally, home ownership is going to remain more competitive for longer. Owners should not have to compete with their own fellow owners on basic property rights and should seek proactive associations when choosing highrise residences. Each community is different. Downtown’s various highrise options are no exception.
For a list of available homes in Downtown Denver, head over to MASONmodern.com.