In it for the long haul: Picking the right real estate market

by Bill Small, Aspen Daily News Columnist
Warren Buffett, perhaps the greatest investor of modern time, has a saying: “The market in the short term is a voting machine, but in the long term is a weighing machine.” Although he was making reference to the stock market, the saying holds true for the real estate market as well. Whether it’s picking the right stock or picking the right real estate market, that choice is the most important decision you make as an investor. If you make the right choice, over the long term, your investment will perform well regardless of the market’s gyrations in the short term.

As an example of how important it is to pick the right real estate market, let’s look at what just a 1 percent difference in appreciation can mean to an investment over the long term. Over the past 100 years, real estate in this country has appreciated at an average rate of roughly 4 percent per year. If 30 years ago you had invested a million dollars in an average real estate market somewhere across the country, that real estate would be worth approximately $3.2 million today. If however you had invested in a real estate market that had appreciated 5 percent per year, instead of 4 percent per year, that million dollar property would be worth $4.3 million today, an almost 34 percent higher value.

In 1975, the average single-family home in Aspen sold for $83,563. In 2012, the average single family home sale in Aspen was $6.17 million. If you calculate the annual appreciation of the average value of a single-family home selling in Aspen over the past 38 years, you get 11.9 percent, or roughly 12 percent annual appreciation. In comparison, if you bought a single family home for $83,563 in some other real estate market in the county where real estate appreciated at the national average of 4 percent per year, your property would have a value of approximately $370,000 today. The Aspen real estate investment would be worth almost 16 times more than the real estate investment in some other real estate market.

On the commercial side, the story is similar. If you trace back the commercial rental history of properties that existed in Aspen 35 to 40 years ago and compare what those properties leased for in the 1970s to what those properties would lease for today, you can determine that the average appreciation of commercial rental rates over that time span is roughly 7 percent per year. This compares to the national average of commercial rent increases over the same period of approximately 3.5 percent per year. Whether it is a commercial property or a residential property, the Aspen real estate market has enjoyed annual appreciation of two or more times the national average. The reason is simple: supply versus demand. Due to land and zoning restrictions, the Aspen real estate market has had a severe cap on the amount of supply of new homes and commercial properties. At the same time, there has been an ever increasing demand from buyers and investors to own Aspen real estate.

Often investors spend too much time worrying whether they will pay a few thousand dollars more for a residential real estate property, or too low a cap rate for a commercial property, when in fact, they should be focused on the fundamentals of the market they invest in. If they intend to hold a property long-term, say 10 years or more, a good market has a way of turning a weak initial investment into a strong performing long-term investment; whereas a market with weak fundamentals will never turn a below value deal into a great investment. If you pick the right real estate market, the old saying that “a rising tides lifts all boats” will apply. Aspen has proven itself to be a dependable positive weighing machine for investors over the long term.


William Small, JD, CCIM is managing director of Frias Investment Advisors, a division of Frias Properties of Aspen that specializes in advising investors and owners of investment real estate.  You can reach him at (970) 429-2419 or email him at Bill@FriasProperties.com.