Which States Are the Most Investor-Friendly?
Renters Warehouse Blog
Which States Are the Most Investor-Friendly?
Did you hear the one about the landlord who’s required to pay the tenant a $4,500 relocation fee? What about the one where the landlord has to store an evicted tenant’s belongings for six months?
No, we’re not talking about jokes –just legislation that’s found in certain states and cities across the U.S. By the way, the first one –is Portland, Oregon; the second one –is Massachusetts.
While the vast majority of the time laws are in place for a reason, to protect tenants (consumers) from landlords (businesses) that may try to take advantage of them, sometimes the law seems to go above and beyond what’s required; especially when it comes to legislation that’s on a local level.
So which states are ideal for investors? In this article, we’ll uncover some states that have good rental property prospects. This includes things like cash flow, relative affordability, returns, and of course, landlord-tenant laws that help landlords to run their business, without having too many extra steps to worry about. With this in mind, let’s take a look at some things you’ll want to look for when assessing states to invest in.
What Do Landlord-Friendly States Look Like?
Before purchasing an investment property, it’s important to do your research.
Find out which laws are in place on a state level, and then research to see what’s in place on a local level as well. Each state has different rules in place when it comes to security deposits, evictions, rent increases, and more. It’s important to make sure you’re familiar with the legislation in the area that you’re thinking of investing in, and take note of how it will impact your returns.
With this in mind, here’s a look at a few characteristics of investor-friendly states.
- A straightforward eviction process. In some states, it can take up to six months to evict a tenant who stops paying rent. In landlord-friendly states, the eviction process is quick and there’s a low tolerance for tenants who violate their lease or don’t pay rent.
- Straightforward landlord-tenant laws. Tenant rights matter. But sometimes, these extend beyond what’s necessary, and puts landlords at a financial risk. In landlord-friendly states, there’s legislation that’s fair for both parties.
- Rent control measures. Rent control measures mean that rent cannot be increased, even though there’s an annual increase in expenses –like taxes and insurance. If you’re thinking about investing in an area with rent controls, carefully consider how the rent control measures will impact your returns. And remember that rent control percentages could increase at any time.
- Property taxes. Property taxes also vary considerably from state to state, with the national average being 1.08%.
- Registration and licensing requirements. Some states or cities require landlords to obtain certain registration or certification to operate a rental. Landlord-friendly states make it easy to own rental property.
- Decent returns. Finally, as a landlord, you’ll want to ensure that you’ll be able to generate decent returns. Pay attention to numbers like cash flow, and calculate your expenses. Consider appreciation as well. Remember, it’s not just about how much you generate in rental income, but how much you’ll be able to keep. Just because the gross is high, doesn’t mean your yield (take-home pay) will be. Different states have different costs and taxes, and you’ll want to carefully consider whether you’ll be able to generate decent returns in the state you’re thinking of investing in.
If you are thinking about investing in a rental property, then here are some landlord-friendly states that you’ll want to consider. These states have been rated as investor-friendly as their legislation makes it relatively easy for an investor to own rental properties, with minimal restrictions, like rent control measures in place. In most cases, these states have local housing markets that offer decent returns. Most of these states also have relatively low property taxes.
See the following chart from RENTCafé. This chart contains helpful legislation information on each state, including statutes on the return of security deposits, termination notice for nonpayment of rent, whether the tenant has the right to withhold rent for failure to provide essential services.
Now, here’s a list of some of the best states for investment properties:
Arkansas law strongly favors landlords. Arkansas is the only state that does not have an implied warranty of habitability. This means landlords are rarely liable for a property’s upkeep –although of course, there are a number of reasons you’ll want to do this anyway!
The law also favors landlords when it comes to abandoned property as well. They can take possession of a tenant’s property that’s left in a rental and do what they want with it.
Arkansas, like many southern states, has been growing economically. According to the Bureau of Economic Analysis, its GDP grew by 8.3 percent between 2015 to 2018.
Average gross monthly rent: $954
Michigan is another state with landlord-friendly legislation. And Michigan’s economy is doing good as well. Employment is spread more evenly across manufacturing, healthcare and social assistance, retail and education services. Michigan’s property tax, though, is slightly on the high side at 1.64%.
Average gross monthly rent: $1,135
Arizona is a state that has fair laws for both landlords and tenants. Eviction in Arizona is fast and simple, and landlords are able to terminate a lease in 10 days if they find false information on a tenant’s application. Plus property taxes are among the lowest in the country, coming in at just 0.72%.
Average gross monthly rent: $1028
Wyoming is a landlord-friendly state, that doesn’t mess around when it comes to late rent. Landlords have the right to enter a tenant’s apartment without notice if the tenant is more than three days late on the rent, and landlords can terminate a lease after three days of nonpayment of rent.
Wyoming has extremely low property taxes. At just 0.61% they’re the 9th lowest in the country.
Average gross monthly rent: $1,114
For a state that’s resolutely landlord-friendly, look no further than Texas. The Lone Star State has been a popular state for investors, thanks to both population growth, relative housing affordability, and landlord-friendly legislation. Texas legislation allows landlords to swiftly evict tenants if the lease is violated and there’s no limit on security deposits –at the state level. Landlords and tenants can also agree on repairs at the cost to the tenant.
Keep in mind, though, that property taxes in Texas are on the high side, coming in at sixth highest in the U.S. at 1.83%.
Average gross monthly rent: $1,449
Indiana’s legislation gives landlords 45 days to return a security deposit, allowing plenty of time to make sure the property wasn’t damaged by the tenant.
Indiana’s average property prices are among the cheapest in the country, with decent home appreciation as well. The cost of living in Indiana is affordable as well.
Average gross monthly rent: $1,098
Evictions are quick and straightforward, and there’s no statute concerning the amount that can be charged for a security deposit.
Despite higher home prices –especially in markets like Denver and Colorado Springs, Colorado is still a good place to invest. There are plenty of areas outside of the hot markets that are still within budget for many investors.
Average gross monthly rent: $1,880
Georgia also tops the list of investor-friendly states, having recently landed number seven in CNBC’s Top States for Business. Property taxes are relatively low, and the workforce is skilled –helping to drive home values, and rents higher.
Legislation in Georgia also favors landlords. There’s no statue on security deposit amounts, and no notice required for termination of the lease due to nonpayment of rent.
Average gross monthly rent: $1,278
North Carolina is another state that many investors have taken notice of lately. With good economic prospects it’s seen a boom in industry and population growth, especially in cities Durham and Charlotte.
It’s also a landlord-friendly state that allows immediate termination for lease violations as well.
Average gross monthly rent: $1,210
The three main real estate markets in the state, Nashville, Memphis and Knoxville, have an average home price of $251,133. The cost of living is also relatively cheap in Tennessee, and property taxes are a low 0.74%. Tennessee’s legislation is also relatively landlord-friendly, making it another place that’s worth considering if you’re in the market for an investment.
Average gross monthly rent: $1,156
Ohio is another state that’s relatively landlord-friendly. Rental property is affordable, and returns are decent. However, there is legislation in place that requires landlords to keep any security deposit that’s greater than $50, or one month’s rent, in a separate interest-bearing account at 5% interest. Landlords must pay the interest to the tenant annually, even if it’s only a few dollars.
Still, Ohio is a decent place to own rental property. The top three real estate markets, Cincinnati, Cleveland, and Columbus, offer affordable prices and strong home price growth, with a cost of living that’s below the national average.
Mississippi is another landlord-friendly state, there’s no limit for how much a landlord can charge for a security deposit, and landlords have 45 days to return the security deposit at the end of a tenancy.
Mississippi also has a low cost of living, which means more purchasing power when it comes to buying property. The three largest real estate markets: Jackson, Gulfport and Hattiesburg, have a combined average home price of just $191,633.
Average gross monthly rent: $1,069
Kentucky makes the list as its legislation is landlord-friendly. There’s no statute limiting the amount of a security deposit, or the amount of time given for a rent increase on a month-to-month lease.
Property taxes are also lower than the national average, coming in at 0.86%.
Average gross monthly rent: $1,082
Other states that are landlord-friendly include:
- West Virginia
- North Dakota
States That Are Less Investor-Friendly
Now, onto a few states that are a bit less landlord-friendly.
Keep in mind, though, that even though these states are considered less landlord-friendly than others, there’s still the potential to generate decent returns here. The key is knowing what you can expect, and factoring the additional costs into your calculations.
When it comes to investing in rentals –there’s often a trade-off; many places that have tenant-friendly legislation, also experience higher rates of property appreciation. So while there’s more red tape, some investors may find that it’s worth it.
With sky-high property appreciation and high rental rates as well –California might seem like a dream come true. But while gross yields are high, expenses are too –the yield for landlords in some California cities –like San Francisco and Los Angeles is surprisingly low. There are also state-wide rent control measures as well as city-specific rent control in place, so keep that in mind when calculating your investment strategy. Many municipalities in California have localized legislation as well, so make sure you research the county and city-wide ordinances and legislation before you dive in.
New Jersey has the highest property taxes out of any U.S. state, coming in at 2.44%, more than double the national average of 1.08%. It’s also generally very strict as to what is considered to be an acceptable cause for eviction. See what’s considered a good cause for eviction in New Jersey.
Oregon now has state-wide rent control measures in place. Rent increases cap out at 7% per year. Most landlords also have to give three months’ notice, and pay a tenant a month’s rent to evict them without cause.
Massachusetts has some of the most restrictive landlord-tenant laws in the U.S. Landlords cannot charge a late fee before 30 days, and are also required to store an evicted tenant’s belongings for six months. Additionally, like a few other states, landlords are required to put the tenant’s security deposit in an interest-bearing account (at 5% interest), and pay them the interest from it annually. Additionally, if not otherwise outlined in the lease, landlords are by default responsible for all of the utilities at the rental.
Least Landlord-Friendly Cities
As we’ve seen, when it comes to investing, it’s important to pay attention to local legislation and economic factors. Here’s a look at some cities where rental property investments may prove to be challenging.
Los Angeles, CA
Los Angeles is a challenging city to invest in rental property, thanks largely to the high cost of buying property –with the median home price is approximately $800,000. Even though the median rental income is $2,881, it would still take a long time to pay off the property. Considering that rental yields average around 4.3%, you’d likely get more for your money elsewhere.
San Francisco, CA
San Francisco has extremely high property values, with a $1.25 million median listing price. Even though the median rent is $4,219, the rental yield of 4.1% is small. In San Francisco, landlords are also required to pay the tenant a relocation fee for certain no-fault evictions. This amount is currently $6,980 per tenant.
Boston is also a costly place to purchase rental property, with $725,000 being the median price for homes. With a medium rent of $2,629, the rental yield is just 4.4%.
Additionally, the City of Boston requires that all rentals are registered with the city, and also requires an inspection of the unit every five years. Failing to register your unit could incur a fine of $300 for every month since the requirement took effect (about five years ago).
In Chicago, landlords are required to place the tenant’s security deposit in a separate, interest-bearing account and pay the tenant the interest annually. If not, they could be liable for two times the value of the deposit. Property taxes are also high in the state of Illinois, coming in at 2.31%. Chicago also has unimpressive employment growth and a declining population.
In Portland Oregon, a landlord who decides not to renew a tenant’s lease must pay the tenant a $4,500 relocation fee (for a 2-bedroom). Oregon also has state-wide rent control measures in place. Property in Portland is relatively expensive, with the average home listing price being $469,000. The median rent is $1,848, meaning it’d take decades for rental income to pay it off.
New York, NY
Getting into rental properties in New York is expensive. Especially considering that it’s one area where it’s cheaper to rent than to buy. With a median home price of $848,000, and a median rent of $2,279, it’d take over three decades to pay off the price of the home. New York also has rent control measures in place in many counties.
While investing in a landlord-friendly state can help you to get the best returns on your investment, at the end of the day, don’t let the prospect investing in an area that’s less landlord-friendly scare you off. There are still plenty of landlords finding success with rentals in these areas, and you can too. The secret is being familiar with the laws, and knowing exactly what you’re working with. And if you happen to live in the area yourself and are familiar with the laws, then you’re already a few steps ahead of the game.
No matter where you’re thinking of investing, make sure you take the time to familiarize yourself with landlord-tenant laws in your state, and city –and do your best to follow them. Always act professionally, screen tenants thoroughly, and protect yourself with an airtight lease. Treat your tenants well, and fulfill your obligations. It’s the best way to keep your tenants happy –and yourself on the right side of the law.
Thinking of investing in an investment property? Be sure to check out the Renters Warehouse Research Center, to find key metrics for properties in the area. See property appreciation, population growth, unemployment rates, and more. Everything you need to make an informed investment!
Note: This article is intended to inform and to guide, it’s not meant to be used in place of advice from a legal professional. The information in this article may change at any time as new laws come into effect, and property taxes go up. Always ensure that you do your research before investing in a state, and make sure you speak with a local accountant to ensure that you understand tax laws for the state if you have any questions.
Yahoo Finance: Best and Worst Cities to Own Investment Property
Smart Asset: Property Taxes
USA Today: Monthly Rent by State
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