I’ll get it out of the way now: I find both major political parties reprehensible and hypocritical. I’ve voted for each roughly equally over my life.

Now, let’s get back to real estate investing.

Taxes and Population Change

Population drives demand for real estate, and a shrinking population poses a major problem for real estate investors. Identifying population shifts, therefore, matters to real estate investors—a lot. 

There’s been a narrative over the last few years that more Americans have started voting with their feet and leaving higher-tax states in favor of lower-tax states. Is it true? 

I started by pulling raw data from the Census Bureau. I then mapped population change for all 50 states:

Investment analyst Ben Reynolds of SureDividend.com pointed out to BiggerPockets a few much-discussed examples: “Texas and Florida are two of the fastest-growing states by population. Not coincidentally, they offer a compelling mix of no state income tax and less cold climates compared to most other states.”

That raises the question of comparing population change to state taxes. Fortunately, that data is also readily available. 

Tax Burden by State

Every year, WalletHub ranks every state by its total tax burden, which includes state income taxes, property taxes, and sales and excise taxes. 

Surprising no one, New York took the top spot with the highest tax burden (12.02% of income for the average resident). New York also lost nearly 102,000 residents last year. 

That’s just one state, of course. Let’s look at states with a population loss last year: 

• California
• Hawaii
• Illinois
• Louisiana
• New York
• Oregon
• Pennsylvania
• West Virginia

How did they rank on tax burden?

The average tax burden ranking for these states is 14. In fact, only one of these states was ranked above the median of 25, and then just barely: Louisiana has a tax rank of 27. 

So yes, there is a clear correlation between tax burden and population change. And yes, I also hear all you skeptics out there objecting that “correlation does not indicate causation.” Go ahead and cling to that if it helps reinforce your existing worldview that taxes play no role in people’s decisions about where to live. 

I’m not saying taxes are the only or even the most important factor in where Americans move. Surveys about moving trends list many stated reasons for moving. But taxes appear to play a role in the calculations—especially for wealthier Americans. 

“Higher-net worth individuals are most likely to move to states with low or no income tax,” said Alexandra Alvarado of the American Apartment Owners Association in a conversation with BiggerPockets. “It may not be the primary reason they are making the move in the first place, but it does influence which states they are moving to. Also, companies that are moving their headquarters to lower tax states also influence migration patterns, as their employees tend to move with them.”

And that says nothing of the state and local taxes you pay directly as a property investor—taxes that eat into your returns on investment. While you can’t avoid federal taxes, you can pick and choose the states and cities where you invest—and their respective tax policies.  

Anti-Landlord Regulation

People love to hate landlords. I’ve never understood this: The same activists who cry out in righteous fury that there’s not enough affordable rental housing are the very ones who rail against “greedy” landlords—the people who supply rental housing. 

In some cities and states, these activists have enacted regulations that heavily favor renters over landlords. Back when I used to buy properties directly, I operated in Baltimore, one of the most tenant-friendly jurisdictions in the country. It once took me 11 months to get a nonpaying “professional tenant” out of my rental property. 

In our group real estate investing club at SparkRental, we focus first and foremost on managing risk. Every month when we get together to vet a new investment, we look at risks like debt, construction, property management, and regulation. 

Regulatory risk matters. If it takes two months to remove a nonpaying tenant in one market and 10 months in another, it adds risk and cost to invest in the tenant-friendly market. 

Look no further than the pandemic-era eviction moratoriums. Tenant-friendly markets extended moratoriums long after the federal moratorium expired, making lease contracts one-way enforceable for years. Many renters lived for free for several years, letting their landlord pay the mortgage and maintain their home while they milked every moment of free rent. 

And now that the precedent has been set, these jurisdictions can play the same card again the next time a “crisis” arrives. 

Therefore, anti-landlord regulation adds risk to your investment. Hard stop. 

Do I Shun These Cities and States?

I’m no political crusader. I’ve invested in markets with high taxes and tenant-friendly regulations. But I’m more cautious when I do so because it adds expense and risk.

In particular, I try to avoid multifamily investments in areas with anti-landlord regulations. That doesn’t mean I avoid all real estate investments there, however. 

Take Southern California. Our passive real estate investing club got together a few months back to vet a property with 11 short-term rental cabins on it. The cabins were in an unincorporated mountain town 90 minutes outside of LA, which relies on tourism to survive. We felt extremely confident that there was no risk of short-term rentals being outlawed, and the cabins don’t allow long-term stays. 

Yes, California has tenant-friendly laws. But they don’t affect that property, and we felt comfortable making that investment together. 

Likewise, we consider industrial, retail, and storage properties in areas with anti-landlord regulations. We even consider mobile home parks with tenant-owned homes in these markets. 

Final Thoughts

But if I’m going to invest in a multifamily property in a high-tax, anti-landlord jurisdiction, I expect the deal to make up for it elsewhere with lower risk than usual. 

You invest however you like with your money. But when you evaluate risk, ignore these factors at your money’s peril.

Source: G. Brian Davis – BiggerPockets article

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The move has been hailed as a breakthrough for real estate investors—and prospective homeowners—as it makes it significantly easier to buy an investment property with less cash. The decision comes at just the right time, given the current high-interest rate climate that has hit real estate affordability hard.

Borrowers will now need just 5% of the total multifamily home value as a down payment, as opposed to the 15% to 25% required prior to the policy change. The change affects loans on duplexes, triplexes, and fourplexes. 

What Are the Requirements for the New Multifamily Home Loan Program?

The most important requirement to be aware of is that this is a loan program based on owner-occupancy. This means that the borrower will have to live at the property and act as a resident landlord. 

The major upside of this requirement is that future rental income can be used to qualify for a mortgage loan. While future rental payments alone won’t make you qualify—you must also meet current income requirements and be paying rent where you currently live—they can count toward the total income requirement for the loan. 

Even better, Fannie Mae has removed the FHA self-sufficiency test requirement for 3-4-unit property loans. The FHA self-sufficiency test requires 75% of the rental income from 3-4-unit properties to be greater than the monthly mortgage repayment amount. Under the new rule, 3-4-unit properties will not need to meet this threshold. Removing the requirement will make getting pre-approved for a mortgage on a multifamily home easier.

The cap on the 2-4-unit loans under the program has been set at $1,396,800, which significantly expands the pool of properties available to investors to include expensive and more luxurious homes. This is obviously significant for beginning investors in more expensive areas, where they previously would have been priced out of the multifamily unit market.

HomeReady loans for low-income borrowers and HomeStyle Renovation loans also qualify under the policy change, which is great news for those real estate investors interested in house flipping or the BRRRR method. 

With the HomeStyle Renovation loan, the total loan amount factors in the costs of the proposed renovations. The HomeReady and HomeStyle options exclude high-LTV refinancing and manufactured housing. Renovator-investors will once again need to remember the owner-occupancy requirement.

Prospective borrowers also need to be aware that high-balance loans and manually underwritten loans are excluded from the policy change.

Benefits of the Program

The new program rollout has been praised as progressive and timely by mortgage professionals. When speaking to National Mortgage Professional, Donielle Geiser, chief operations officer of Thrive Mortgage, called the lowered down payment requirement a ‘‘golden opportunity’’ for prospective homeowners and budding investors ‘‘looking to engage in a smart way of not only building equity but also adding an additional revenue stream. One of the surest ways to build wealth over time is to offset a liability with an income-producing asset.’’  

Becoming an owner-landlord also reduces some of the administrative burdens that a first-time investor may be unprepared for. Valuable experience in managing a property and tenants is already built into this program because of the owner-occupier requirement.

The potential downside, of course, is that you, the investor, will have to live alongside your tenants in a multifamily unit, which won’t appeal to everyone. The owner-occupancy requirement also means that the principal borrower will need to move into the property within 60 days of completing the purchase and live in the property for at least a year. 

You’ll also need to factor the inevitable property maintenance expenses into your budget, which means that the rental income you receive may end up covering less of your own mortgage than you would like. 

Still, the additional responsibilities and potential sacrifices of privacy will be worth it for many who have dreamed of real estate investing but have lacked the cash needed to enter the real estate investment market.

When Can I Apply for the New Fannie Mae Loan?

You can apply now. Fannie Mae’s mortgage software has been updated to reflect the policy change, and can now receive applications for the 5% down payment multifamily loans. Some relevant details will be ironed out toward the end of November—for example, private mortgage insurance companies have yet to release their rates for the 5% mortgages—but you can gather all the necessary documentation and begin the application process now.

Source: Anna K. Cottrell – BiggerPockets

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In the world of investments, one avenue stands out for its long-standing track record of creating wealth and financial security: real estate. Investing in real estate has proven to be a reliable and effective way to build wealth over time. From seasoned investors to newcomers, many are drawn to the tangible and enduring benefits that real estate offers. In this article, we will explore why investing in real estate is a good way to create wealth.

1. Tangible Asset

Real estate is a tangible asset, which means you can see, touch, and have direct control over it. Unlike stocks, bonds, or other financial instruments, real estate allows you to own a piece of physical property. This tangibility provides a sense of security for investors, as they have something concrete to fall back on.

2. Appreciation in Value

One of the primary ways real estate builds wealth is through the appreciation of property values over time. Historically, real estate properties tend to increase in value, often outpacing inflation. This means that as you hold onto your real estate investments, they can grow in worth, providing you with substantial gains when you decide to sell.

3. Rental Income

Investing in rental properties can generate a consistent stream of income. By leasing your property to tenants, you receive monthly rental payments, which can cover your expenses, including mortgage payments, property maintenance, and taxes. Any surplus income becomes a source of passive income, allowing you to reinvest or save for future investments.

4. Diversification

Diversifying your investment portfolio is essential for managing risk. Real estate offers a unique opportunity to diversify beyond traditional stocks and bonds. This diversification can help shield your wealth from market volatility, as real estate markets often behave independently of the stock market. When stocks are down, your real estate investments may still be performing well, providing a valuable hedge against economic uncertainty.

5. Tax Benefits

Investing in real estate comes with several tax advantages that can boost your overall wealth-building strategy. Mortgage interest, property taxes, and depreciation are just a few of the expenses that can be deducted from your taxable income. Additionally, long-term capital gains from real estate investments often enjoy favorable tax rates, providing a tax-efficient way to build wealth.

6. Leverage

Real estate allows you to leverage your investments, meaning you can control a more substantial asset with a relatively small amount of your own money. This leverage can magnify your returns. For example, if you buy a property with a 20% down payment, any appreciation in the property’s value accrues to the entire property’s worth, not just the initial 20% you invested.

7. Inflation Hedge

Real estate has historically proven to be an effective hedge against inflation. As the cost of living rises, so does the rental income generated by real estate investments. Additionally, property values often appreciate in response to inflation, preserving and potentially increasing your wealth.

8. Long-Term Stability

Real estate investments typically exhibit more stability compared to other investment options. While stocks can experience significant fluctuations in a short period, real estate values tend to be less volatile over the long term. This stability allows investors to hold onto their properties and accumulate wealth steadily over time.

Conclusion

Investing in real estate is a tried-and-true method for creating wealth. Its unique combination of tangibility, potential for appreciation, rental income, tax benefits, and diversification opportunities make it an attractive choice for investors looking to secure their financial future. While real estate investing requires careful research, planning, and management, the potential rewards in terms of wealth creation and financial security make it a compelling choice for investors of all levels of experience. So, whether you’re a seasoned investor or just starting, real estate should undoubtedly be a part of your wealth-building strategy.

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Nationwide, cities continue to impose new regulations on short-term rentals, effectively putting Airbnb hosts out of business in some areas. So far, legal attempts to fight the restrictions have been largely unsuccessful. For example, Airbnb and several local hosts brought lawsuits against New York, but both were dismissed, and new rules that prohibit short-term rentals in most cases went into effect on Sept. 5. 

, cities continue to impose new regulations on short-term rentals, effectively putting Airbnb hosts out of business in some areas. So far, legal attempts to fight the restrictions have been largely unsuccessful. For example, Airbnb and several local hosts brought lawsuits against New York, but both were dismissed, and new rules that prohibit short-term rentals in most cases went into effect on Sept. 5. 

In about 80% of Airbnb markets, regulations impact short-term rentals, according to the company. Some cities are concerned about lost tax revenue and have imposed the same tax rates on vacation property owners that hotels are subject to. Those moves impact a property owner’s profit margins at a time when revenue per listing is down in many cities due to an oversupply of vacation rentals. 

But in other areas, the restrictions mean that many rental property owners can no longer operate. For example, the New York law requires that hosts live in the unit they’re renting and that guests have full access to the property. And hosts who violate the law face fines of up to $5,000. 

The cities of Denver and San Francisco have similar rules. These rules benefit homeowners renting out a spare room since they reduce competition but prevent most investment property owners from doing business. 

There are some in-between scenarios as well. Some cities, like Santa Rosa, California, have put caps on the number of permits available to hosts. In Jefferson County, Colorado, properties must be on at least one acre of land to qualify for a permit. 

While not as extreme as New York’s restrictions, these ordinances leave some investment property owners out in the cold. 

The Impact on Listings

Listings have fallen significantly in some cities since new restrictions were enacted. In New York, there were 39% fewer listings in July when compared to 2018. In San Francisco, there was a 19% drop, according to data from AirDNA.

Meanwhile, listings are thriving in cities without significant regulations. For example, listings in San Antonio, Texas, have doubled since 2018, as of July, while listings in the Scottsdale-Phoenix area in Arizona grew 91%, and Indianapolis saw a 76% increase in listings. 

That doesn’t mean that hosts in those cities are enjoying increased profits. The opposite is true—revenue per listing is dropping in cities like Phoenix and San Antonio, though the extent to which revenues are falling depends on who you ask. We began reporting on the decrease in revenue per property in January when it became apparent that the glut of short-term rental properties was driving down occupancy rates. 

But at least hosts in cities with little oversight can try to compete for bookings. In some cities, hosts are forced to switch to long-term rentals to collect some income, which may not be enough to cover their expenses. 

The Justification for Short-Term Rental Regulation

There are some known issues with short-term rental properties, like loud noise, traffic overflow, and parties, says Claudia Cobreiro, a Miami-based real estate attorney. “Counties, cities, municipalities, or communities may enact rental restrictions to reduce or avoid some nuisances that can sometimes be associated with short-term vacation rental tenants,” Cobreiro says. “The community’s and its residents’ security is also a frequent motivation for regulation and restriction.” 

But cities debating new short-term rental restrictions are also pointing to housing affordability problems as a reason to pass regulations. It’s a hot-button issue in small towns and major urban hubs alike, with residents often divided on the right course of action. 

For example, in Columbia, Missouri, only 37% of residents support regulating where short-term rental properties can be located, although most support requiring property owners to register. But in the area where most vacation rentals were located, 47% want the regulations. 

Research has shown that short-term rental properties have an impact on home and rent prices—one U.S. study noted a 0.018% increase in rents and a 0.026% increase in home prices for every 1% increase in listings on Airbnb. Another study showed that the expansion of Airbnb listings in New York City caused rents for residents to surge by $380 in a single year. That’s due to a reduction in the housing supply from properties that might otherwise be rented out long-term if Airbnb wasn’t an option. 

Of course, tourism also brings economic activity to an area, creating more jobs for locals. A report from Airbnb notes that in five Colorado counties, Airbnb guest spending supported 15% of all jobs and generated 12% of earnings for workers in the area. 

However, the Economic Policy Institute argues that the economic benefits of Airbnb are often overstated since the spending would happen anyway if short-term rental properties weren’t available. Only 2% to 4% of travelers in two surveys report that the unavailability of Airbnbs in an area would impact their trip plans. The rest would have stayed in hotels, creating similar economic benefits—without the reduction of housing supply. 

The role of the hotel industry can’t be overlooked. The American Hotel and Lodging Association began plans to lobby politicians and state attorneys general and fund studies that showed the negative impact of Airbnb in 2016, documents show, pouring millions into regulatory work. The association was behind a bill that hiked fines for Airbnb violators in New York City, for example. 

That makes it tough to tell where these new initiatives are originating from—supporters of new regulations tend to argue that they’re addressing housing affordability. In Arizona, where a 2016 law limits cities from passing short-term rental regulations, local lawmakers are pushing for reform. They argue that the law doesn’t defend property rights as intended but instead allows investors to violate the property rights of residents for their financial benefit. Meanwhile, hotels sit half-empty, and families are displaced from rental homes, lawmakers say. 

While some larger investment firms have gotten into the Airbnb market, most Airbnb hosts are small investors—everyday people looking to supplement jobs with insufficient income or build wealth for their heirs. As regulators make efforts to limit short-term rentals with the goal of expanding affordable housing, the livelihood of small investors merits consideration. 

Some municipalities have made efforts to incentivize investors to provide local housing rather than banning short-term rentals. For example, Summit County in Colorado offered eligible property owners $22,000 per lease in exchange for renting their properties long-term to local workers at a capped rental rate. 

The program ran out of budget in 2023 due to high interest, though officials are working to extend the funding based on the program’s success. The county also imposed new caps on short-term rentals this year, which homeowners are challenging. 

How to Navigate Short-Term Rental Laws

Cobreiro says investors need to arm themselves with information. “To determine whether a property is affected by a short-term rental restriction, an investor should obtain all relevant property information from the homeowners’ association, if applicable, and do the same at the city, municipality, county, and state level for similar regulations,” she says, noting that homeowners associations often have restrictions that may stem from local ordinances. 

It also makes sense to work with an attorney because “understanding a city’s short-term rental laws, or even the short-term rental restrictions of a given homeowners association, could make or break an owner’s ability to make a return on an investment property,” says Cobreiro. 

In addition, an accidental violation can be a nightmare for investors. “Violation of rental restrictions at the association and government level can cause the investor to face penalties and fines associated with the breach, which can sometimes quickly escalate daily and lead to a lien against the property to enforce payment,” she says. 

It’s also important to have a backup plan, especially if you’re investing in an unregulated area near a municipality with strict rules since there can be a domino effect. The medium-term rental strategy is one way to circumvent local laws that govern rentals of less than 30 days, and demand is picking up for month-to-month rentals. Monthly stays on Airbnb surged in the fourth quarter of 2022, accounting for 22% of bookings. 

The Bottom Line

As more localities crack down on short-term rentals, property owners and aspiring investors alike need to prepare for a regulatory scenario that would prevent them from earning rental income on short-term rental platforms. Talk to a local real estate attorney before closing on a deal to help you make sense of any restrictions, and run the numbers for a medium-term and long-term rental strategy to ensure you have a viable backup plan. 

Author: Lindsay Frankle Source: Biggerpockets

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