Taxes and regulations affect your bottom line as an investor, but not always directly or indirectly obviously method. Unfortunately, as soon as you start talking about any of this, the average person closes their minds and circles around their existing worldview and only hears the data points that support it. Don’t hesitate anymore Yale University Researchsuggesting that people perform worse on math problems if the correct answer conflicts with their political ideology.
I’ll get it out of the way now: I think both major political parties are reprehensible and hypocritical. Throughout my life I’ve voted roughly the same for everyone.
Now, let’s get back to real estate investing.
Taxes and Demographic Change
Population drives real estate demand, and population decline brings real estate demand main Real estate investor questions. Therefore, identifying demographic changes is important for real estate investors.
have was a narrative over the past few years More and more Americans are voting with their feet, leaving high-tax states in favor of low-tax states. yes it real?
I first extracted the raw data from Census Bureau. Then I plotted population change for all 50 states:
Investment Analyst Ben Reynolds SureDividend.com Pointing out some of the much-discussed examples to BiggerPockets: “Texas and Florida are two of the states with the fastest growing populations. Not coincidentally, they offer a compelling combination of no state income tax and a less-cold climate. compared to most other states.
This raises the question of comparison Demographic changes State taxes. Fortunately, this data is also easy to obtain.
state tax burden
Each year, WalletHub ranks each state based on its total tax burden, including state income taxproperty tax, sales tax and excise tax.
strangeness No one, New York tops the list with the highest tax burden (12.02% of the average resident’s income). New York also lost nearly 102,000 residents last year.
Of course, this is just a state. Let’s look at the states that lost population last year:
- california
- hawaii
- Illinois
- Louisiana
- New York
- Oregon
- pennsylvania
- west virginia
How do they rank in terms of tax burden?
These states have an average tax ranking of 14. Actually, only one of these states be ranked Above the median of 25, and then just barely: Louisiana has tax brackets of 27.
So, yes, there is a clear correlation between tax burdens and demographic changes. Yeah, I hear all you skeptics too over there Objection “Correlation does not imply causation.” If it helps reinforce your existing tax worldview, stick with it play no role People’s decisions about where to live.
I’m not saying taxes are the only or even the most important important Factors in where Americans move. Survey on mobile trends List many clear reasons for moving. but tax It seems Play a role in computing—especially for wealthy Americans.
“high net worth individuals Individuals are most likely to move to states with low or no income taxes. American Apartment Owners Association In conversation with BiggerPockets. “It may not be the main reason they move, but it does affect which states they move to. In addition, enterprises That is Move headquarters to low tax state also Influence migration patterns as their employees tend to migrate with them.
That’s without even getting into the state and local taxes you pay directly as a real estate investor, which can eat into your investment returns. While you can’t avoid federal taxes, you can choose the states and cities in which you invest and their respective tax policies.
anti-landlord regulations
People love and hate landlords. I never understood this: the activists who scream with righteous indignation about not having enough affordable housing are Very Those who complain about “greedy” landlords –people Who provides rental housing.
In some cities and states, these activists have enacted regulations heavily Prioritize tenants over landlords. when coming back I’ve bought properties directly, I’ve run baltimore, one of the most tenant-friendly jurisdictions in the country. it once I spent 11 months trying to get a non-paying “professional tenant” to leave my rental property.
In SparkRental’s Group Real Estate Investment Club, our first focus is risk management. every month when We come together to review new investments and we look at risks such as debt, construction, property management and regulatory.
Monitoring risks is important. If it takes two months to remove a tenant in a market who is not paying rent, and 10 After a few months, it increases the risk and cost of investing in a tenant-friendly market.
Just look at the pandemic era. Eviction moratorium. Long after the federal moratorium expired, tenant-friendly markets extended the moratorium, allowing lease contracts to be enforced one-way over multiple years. Many renters live for free for years, letting landlords pay their mortgages and maintain their homes while they squeeze out free rent at every turn.
Now that there is a precedent Already setthese jurisdictions can play the same card again when the next “crisis” comes.
Therefore, anti-landlord regulation increases your investment risk. hard stop.
Would I avoid these cities and states?
I’m not a political fighter. I invest in markets with high taxes and tenant-friendly regulations. but I’m more cautious when i do Because it increases costs and risks.
Especially, I try avoid Multifamily Invest in areas with anti-landlord regulations. However, that doesn’t mean I would avoid all real estate investing there.
Take Southern California, for example. A few months ago, our Passive Real Estate Investment Club got together to review a property with 11 short-term rental cabins on top. The cabins are located in an unincorporated mountain town 90 minutes outside of Los Angeles that relies on tourism to survive. We are very confident that there is no risk short term rental bannedand the cabin does not allow long stays.
Yes, California has tenant-friendly laws. But they won’t impact the property and we feel comfortable making this investment together.
Likewise, we considered industrial, retail and warehouse properties in areas with anti-landlord regulations. We are even considering building mobile home parks with tenant-owned homes in these markets.
final thoughts
but if I’m going If I were investing in multifamily in a high-tax, anti-landlord jurisdiction, I would expect the deal to make up for it in other places where the risk is lower than usual.
You can invest your own money however you want. but when you evaluate riskignoring these factors will put you at financial risk.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
