Find out how real estate investors can choose the most landlord-friendly state for their next investment property.
Landlords choosing an investment property should always consider the real estate laws in the state where the rental property is located. These regulations have a significant impact on how landlords can conduct their business and make a profit — meaning that determining where to invest in real estate is critical to your success. In this article, we’ll share strategies to help investors choose landlord-friendly states.
Many investors make real estate purchases based on the ease of doing business in a property’s location. The following factors impact the amount of time and hassle that landlords in certain areas may experience when managing rental properties.
Today, areas of California, New York, New Jersey, Maryland, Oregon, Minnesota, and Washington, D.C. have some form of residential rent control in place. But as inflation and rent prices continue to rise, additional states are considering limiting how much landlords can raise rent for existing and new tenants. This is not a concern for landlords in the 37 states in which rent control is explicitly banned, but that could change.
Tenants’ rights groups in Boston, Massachusetts are currently campaigning for rent control bans to be lifted to combat increasing eviction rates. Rent control legislation is also expected to change in cities across Arizona, Florida, Hawaii, Illinois, Kentucky, New Jersey, New York, and Washington following moves by regulators to add or expand rent control protections.
All landlords should be fully aware of their tax obligations when they purchase a rental property. For instance, they might be tempted to purchase property in Illinois, New Hampshire, and New Jersey — but these states have some of the highest property tax rates in the country. While some cities appear to have relatively low tax rates, it’s important to look at their historical tax growth — for example, tax rates in Greely, CO and Anchorage, AK both rose more than 26% from 2019 to 2020. On the other hand, Texas, Michigan, New Mexico, and other states restrict how much taxes can grow in a single year.
Landlords should be sure to capitalize on all available tax benefits of owning rental property in certain cities and states. Most states offer tax benefits and deductions to attract landlords to their jurisdictions. These benefits can include the ability to write off rental property-related expenses, such as maintenance costs, utilities, insurance premiums, and more.
Despite their best efforts, some landlords end up renting their property to problematic tenants who default on payments, damage the property, or refuse to meet predefined obligations. Landlords can minimize this risk by conducting thorough tenant screening, and choosing a state that enables fast, straightforward evictions when necessary. Alabama, for example, allows owners to evict tenants for unpaid rent with seven days’ written notice, while Florida allows just three days’ notice in certain circumstances.
Rental property owners must consider the laws that govern their business in each state, such as the capital gains exposure that a business has upon the sale of their property.
Rental property owners that choose to replace the properties they sell with another purchase can use a 1031 exchange to limit their capital gains exposure — but investors don’t always immediately purchase new properties after selling one in their portfolio. Each state deals with business owners differently and property owners should always consider things like how long it would take them to liquidate their assets should they need to, and their legal obligations in different market conditions. Idaho, Indiana, and Ohio are examples of states that allow property owners to sell or transfer ownership of their assets with low taxes and no wealth-related taxes. On the other hand, New York, Maine, and Vermont tack extra costs onto property owners that inherit or are gifted property to use as business assets.
Before purchasing rental property in any state, landlords should evaluate the rental market. This evaluation should include demand for rental properties, operating costs, and rental rates. As costs rise across the country and hybrid work arrangements grow in popularity, tenants are looking for more cost-effective rental options. This has made up-and-coming cities such as Boise, Idaho and Salt Lake City, Utah extremely popular locations for renters.
That said, landlords should be aware of the high operating costs of managing and maintaining properties in these popular areas, and price their rent accordingly to ensure a comfortable profit margin.
Rental property owners can choose from many different states that serve investors with different needs. Whether you are a buyer looking to purchase a short-term rental property or to serve long-term tenants, here are some of the most landlord-friendly states in 2022.
Alabama gives landlords significant leeway in how they manage their rental properties and their inhabitants. As noted earlier, landlords are only required to give tenants seven days’ notice before eviction if they fail to pay their rent, and 14 days if they violate their lease terms. Alabama also has no limits on late fees landlords can charge, and does not require landlords to obtain a license before they can rent their property.
Florida has no rent control, and there are also no limits on late fees and security deposits that landlords can set for their own protection. As noted earlier, evictions are often straightforward in the state, where in some cases landlords are only required to provide tenants with three days’ notice if they fail to pay their rent. The state also has low property taxes, with the average property owner being on the hook for just 0.98%. That said, Florida landlords should be aware of the state’s weather risks (e.g., hurricanes, high winds, and flooding) and purchase the right landlord insurance coverage.
The Lone Star State gives potential investors a market with high rental property demand, relatively low prices, and significant landlord protections. Landlords in the state are only required to provide three days’ notice before evicting tenants who default on rent. They are also allowed to seek compensation for any inconveniences or financial losses they have faced due to the tenant.
While property in Indiana is cheaper than in other states, the median rent in the state has reached $1,100 and is expected to rise in the coming years. Landlords here can expect high returns while receiving protections such as a 45-day deposit hold to cover damages and a 10-day notice period for defaulting tenants.
Unless the lease specifies it, landlords in Georgia don’t have to provide their tenants with any written notice before eviction proceedings. Disputes and issues are settled quickly with arbiters usually favoring landlords. Late fees and security deposits are also left to the discretion of landlords, with no laws restricting how much they can charge.
Landlords have to make the decision to purchase a rental property before receiving a single cent of profit — but that decision will greatly affect their future earnings. Choosing the state with the right balance of protections and benefits can help landlords find a property that serves their needs and provides a healthy return on investment.
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