What economic impact does legal marijuana have on real estate? How does a neighborhood dispensary affect nearby home values? Can savvy property investors take advantage of marijuana-related real estate trends?

When house hunting you may want to add this to your list of considerations or then again maybe it is something you want to avoid.

Whatever the case may be, you will be better equipped to make an informed decision when it comes to marijuana and home prices after reading our guide.

A recent study by Clever Real Estate can answer these questions and perhaps point you to a lucrative investment. 

Legal Marijuana and Home Price Appreciation: Is There a Link?

Researchers at Clever Real Estate analyzed publicly available data from Zillow, the US Census, and other sources to determine any relationship between real estate values, cannabis legalization, local dispensaries, and tax revenue.

Here are some of their findings:

• Real estate values: Between April 2017 and April 2021, home values increased by $17,113 more in states where recreational marijuana is legal than in states where marijuana is illegal or allowed for medical use only. And housing values in states with some form of legal cannabis, whether medicinal or recreational us, increased by $6,338 more than in states without legal marijuana. 
• Local dispensaries: Real estate values increased $22,090 more in cities with recreational dispensaries than in cities where recreational marijuana is legal but dispensaries are not available. And every dispensary in a city added increased home values by an average of $519.
• Tax revenue: The eight states with fully developed marijuana programs earned $2.3 billion in tax revenue in 2020. On average, home values increased by $470 for every $1 million increase in tax revenue.

Why would the availability of recreational cannabis impact property values? It appears to create a virtuous circle — the industry generates new jobs and demand for residential and commercial space, which pushes prices and property tax revenue up.

Marijuana also increases sales tax revenue, which state and local governments use to boost public services and schools. This eventually makes an area more desirable and more expensive. 

How Does Recreational Marijuana Impact Local Economies?

The results of recreational marijuana’s impact on local economies are mixed and depend on the locality. 

Real estate markets with fully operational systems for recreational marijuana use may attract more homebuyers, including marijuana consumers, businesspeople, and employees.

With more marijuana stores opening up, says the Forbes Real Estate Council, “the demand for labor is on the rise, and so is the need for homes. Increased property sales and higher rents will be the most significant payoffs.”

A 2020 University of Oklahoma study concluded that “within states that legalize recreational marijuana use, homes experience a positive valuation shock when a dispensary opens nearby, and that “there is a large positive spillover effect on the housing market following legalization.”

The National Association of Realtors (NAR) conducted its own research and reported similar findings — that “states, where medical and recreational marijuana have been legalized for more than three years, have seen more increases in demand for commercial properties.” In fact, demand for warehouses increased by 42%, storefronts rose by 27%, and land by 21%.

However, the results are not uniform when it comes to residential real estate. In 12% of communities, says the NAR, property values rose after opening a new dispensary nearby. But prices fell in 27% of neighborhoods with new dispensaries.

So although legal marijuana might be a positive development for a state’s economy and overall property values, it might not be great for specific localities — it really depends on a town’s population, culture, political climate, and proximity to other towns that do or do not have dispensaries. 

Are Marijuana Dispensaries the New Trader Joe’s?

Back in 2019, Attom Data Solutions analyzed home prices and trends and concluded that homes flipped near a Trader Joe’s experienced an average gross return of 31% and a 5-year home price appreciation of 33%.

The Forbes Real Estate Council says, “It’s interesting to note that new dispensaries’ impact on housing prices is rather similar to new grocery stores’ impact. A preference for neighborhoods with more dispensaries for convenience could indicate that marijuana stores are increasingly seen as one of the top amenities for some homebuyers.”

When considering the “location, location, location” of a home purchase, it’s probably smart to factor in areas slated for the addition of dispensaries. 

Is There a Downside to Legal Marijuana?

There are varying opinions. A University of Wisconsin study found that Colorado, the first state to legalize recreational marijuana, experienced a sharp increase in housing demand (attributed to marijuana-related employment growth), lower crime rates (because marijuana use was no longer a crime), and “additional amenities located in close proximity to retail conversions.”

However, groups against legal cannabis have brought up potential problems:

• Increased suicide and mental illness
• A rise in traffic deaths
• Spike in drug-related crime
• Reduced teen academic achievement
• Harm to public health

Investigators at the Cato Institute reviewed previous studies and new data and concluded that these fears were largely unfounded. They assert that “we found that the strong claims made by both advocates and critics are substantially overstated and in some cases entirely without support from existing legalizations; mainly, state legalizations have had minor effects.”

Investment Opportunities: States to Consider

If you own income properties in states without legal recreational marijuana, consider trading some for investment property in established cannabis-friendly states or states with cannabis industries that are just getting off the ground.

You might, for instance, effect a 1031 tax-deferred exchange from a property in South Carolina, where marijuana is illegal, to one in Illinois, where marijuana is legal. Keep in mind that commercial properties also surged in value where cannabis is legal — you needn’t stick to residential buildings.

Illinois is surrounded by states that either has not legalized cannabis or have legalized it for medical use only. That creates more potential cannabis-related appreciation than a home right next to a cannabis-friendly state.

Oregon, for instance, has legalized recreational marijuana, but it’s adjacent to several established recreational use states — California, Washington, and Nevada. 

One question you may have when buying property is whether to buy in states that have legalized recreational marijuana but have not yet implemented sales, so they have not yet begun to see the increased sales tax revenue or the addition of industry-related jobs. That’s not a bad idea. Once these states fully develop their cannabis sales, expect home prices to rise faster than they otherwise would. 

Clever looked into five developing cannabis states and reports that, “According to our analysis, these five states (Montana, New Mexico, New York, Virginia, Vermont) would have seen home values increase by an average of $61,343 had they legalized recreational marijuana in 2017.” 

There are 22 states that have legalized marijuana but have not yet deployed sales. Of these, 19 have only legalized medicinal cannabis, while three have legalized all uses. It’s recreational use that drives higher home price appreciation, but even medical use has a positive effect.

Of course, many factors determine the potential return of investment property — but legal cannabis is an important consideration when you’re looking to build or buy an investment property.