Appreciation is the critical factor in the success of a rental home investment. In fact, because the ratio of gross rental income to the properties' market value is lower than in other income producing investments, appreciation is the one factor that makes rental houses viable as an investment alternative.

For the sake of clarity, let me elaborate on that just a bit. In many areas of the country today, a single family home is considered to be an excellent investment if the annual, gross rental income is 8 to 10 % of the purchase price of the property. (In fact, in some areas homes are purchased for investment with the first year's anticipated annual rent to be as low as 5% of the purchase price.) However, in these same areas, an investor will insist upon gross rents of 10 to 12+% of the annual income to purchase multiple family units or other income producing properties.

This is simply because the market value of other income producing investments is dependent upon the properties' ability to produce income, whereas, a single family home's value is dependent upon what a typical buyer will pay for the property as a living unit. Thus in assessing the viability of investment in single family homes, a prudent buyer will want to have an sound conviction regarding the probable appreciation.

One of the more thorough appreciation studies is completed quarterly by the Office of Federal Housing Enterprise Oversight (OFHEO). They accumulate single family home appreciation data for oversight of Fannie Mae and Freddie Mac loans. Their full report is available approximately sixty days following the end of each quarter on the Internet at "www.ofheo.gov/house".

The 1998 year end report indicates that while the Mountain region, including Colorado, grew at 3.8% during 1998, it appreciated at 35.5% over the past five years - an average of 7.1% per year. Colorado homes appreciated at 5.2% during 1998 and 41.7% over the past five years - a yearly average of 8.3%. These percentages rate Colorado as the 8th highest

appreciating state in the U.S. for the past year and top appreciating state over the past five years.

For perspective, the following chart shows the top 14 states' rankings and the average for the U.S.:

Perhaps of more importance, what is the future of appreciation in Colorado? Does the lower rate of appreciation in 1998 indicate reduced appreciation in the future? Is it time to sell and buy something more solid - like futures in pork bellies?

First, let me say that an appreciation rate of 4.5 to 5% is healthy indeed. Continued appreciation at this level will enable an investor to record heavy profits over a reasonable period of time. The averages noted above are just that... averages. Obviously, to arrive at a 5.2% rate there were areas that were appreciating at much lower and much higher rates. From purely a financial point of view, it would be smart to invest in those areas where appreciation will be the highest. Where
are these areas? Fortunately, this is not difficult to discern.

Where will growth be the most intense? Where will traffic increase the most? Where are subdivisions being planned? Where are the new companies locating? Which town's political actions lead to artificial price increases? These and other market questions will lead you to areas that will experience significantly higher increases in appreciation due to increased people pressure.

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