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This week we want to address the issue of whether a particular State in the US is “landlord friendly”. This is an important factor which needs to be taken into account in the decision making process when considering a syndicated multi-family or BTR-SFR property investment.
A property may appear to offer a great passive investment opportunity, but is the State in which it is located favourable to landlords? Or are there restrictions, limitations or rules and regulations which make investing, no matter how attractive, the multi-family or BTR-SFR investment not worth considering?
What does being landlord friendly mean?
Determining whether a State is landlord friendly involves assessing a variety of regulatory criteria, some of it subjective, as potential REPE investors will have different opinions about what is most important to them in terms of achieving their investment returns.
Broadly speaking, however, for a State to be landlord friendly means that real estate investors have wider authority to properly oversee their investments and work to maximise their rentals without undue limitations.
In short, landlord friendly States will have laws, practices, or generally lower operating costs which are to the favour of landlords. However, due to local municipal laws, different cities within the same State can vary when it comes to being considered landlord friendly.
Therefore, whilst issues such as the crime rate in a city or neighbourhood or the overall economic situation may have a bearing on the desirability of investing in a State from an investment return perspective but being landlord friendly tends to focus on the rental regulatory environment.
Rent control is legislation adopted by a city or district to allow tenants in their homes after they have moved in without the threat of having to move out due to large rent increases. It sets limits on how much and the frequency by which a property owner can raise rentals.
Under rent control ordinances, tenants also enjoy significant protection against arbitrary eviction.
Many States do not impose rent control whilst many others allow municipal governments to pass their own legislation.
Where rent control ordinances are in place, the rental increases are often based upon a consumer price index (“CPI”) cap.
Obviously, rent control restrictions affect the ability of landlords to recoup costs associated with operating their properties and often lead to a lack of maintenance or repair.
Across the US, the average property tax rate is 1.1% and largely depends on which State a landlord is based in and how many units they purchased there. Such taxes levied on rental properties are determined by local governments, and landlords pay these taxes annually.
Obviously, if the average rate in a State is below the national average, multi-family or BTR-SFR investors may be more inclined to invest there.
Limits on security deposits
Not only do some States limit the amount of rental equivalent which landlords can collect for security deposits but others allow owners less time to return such deposits. The combination of these conditions means that, when owners do not have sufficient time to inspect their properties before returning security deposits, they may overlook any damage caused by tenants and, as a result, suffer financial loss..
Eviction process is streamlined
The eviction laws in a State outline the type of lease violations which give grounds for eviction and the length of notice landlords have to give to tenants.
Some States with strong tenant eviction laws, and it may be difficult for a landlord to remove tenants causing problems from their multi-family or BTR-SFR rental properties. In such cases, when a landlord wants to evict a tenant, there are likely to be significant delays and a dues legal process involved before an eviction may proceed.
Clearly, where a State has laws that enable property owners to rightfully evict tenants in a simple and timely matter, investment in rental properties will be encouraged.
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Short notice requirements
Landlords have to enter their rental properties from time to time, whether it be for an inspection or repair. A State’s rules regarding the right to enter a rental property can affect a landlord’s ability to protect their property. A State with shorter notice requirements can make it easier for a landlord to efficiently manage their properties, thus making the state more landlord-friendly.
Enhanced right for tenants
In certain States there are laws which provide additional rights for tenants which affect a landlord’s rights over its property. This may include full authority allowing tenants to have the right to make repairs and deduct the cost from their rent if a landlord does not make repairs in a timely manner.
Some jurisdictions require landlords to acquire a licence before renting out their property, taking time and adding to operational expenses.
Based on an objective assessment of the pros and cons on investing into multi -family or BTR-SFR properties in various States, here is a summary of the top 10 most landlord friendly locations investment in the US:
- Arizona: favourable legislation on leases, security deposits and eviction procedures. When it comes to property taxes, plus low property taxes of 0.62%.
- Florida: no rent control, late fees are not prohibited, no maximum security deposit. Damages incurred by tenant above normal wear and tear can be deducted from deposit and property tax rates of only 0.98%;
- Georgia: no limits on late payments or security deposits, the property tax rate is only 0.91%. There are no rules for notification before entry by landlords; plus flexible eviction rules;
- Colorado: favourable eviction regulations based on compliance demand notices that expire after 72 hours, average property tax rate: 0.49%. No security deposit limit and no statutory guidance on landlord access;
- Texas: favourable eviction process; no cap on security deposits. If tenants are behind on rent payments, landlords can refuse to pay for repairs;
- West Virginia: property taxes only 0.57% making it the State with the eighth-lowest property taxes in the country. No security deposit restrictions, no rules allowing a tenant to repair and deduct rent, and favourable eviction process;
- Indiana: low taxes, a no-tolerance policy for non-paying renters, and landlord-friendly security deposit regulations;
- Alabama: low-income tax and effective property tax rates, plus no prohibition on late rent fees. Clear eviction processes;
- Illinois: established rules on security deposits and no limit on setting rentals;
- North Carolina: no state-imposed rent control or limit, tenancies can be ended with a written notice. The average property tax rate is 0.77%
CPI Capital studies very carefully all aspects about investing in a certain State before committing to any multi-family or BTR-SFR syndicated investment. There are certainly some States which favour landlords in sure financial terms, whereas others provide owners more control over their rental properties, and others do both.
Our team at CPI Capital are both knowledgeable and experienced about rental control issues but also appreciate that, as landlords, we have to abide by certain standards and follow Federal landlord-tenant acts.
We always aim tomaximise returns for our passive investors , whilst complying with the law!
CSO, COO, Co-Founder CPI Capital