When it comes to investing in real estate, you want to focus on investing in the regions that have the most influx of people. In other words, which states are experiencing the biggest migratory trends.
More people come due to more jobs. More jobs leads to more productivity and output for the economy. More jobs, more income, and more people ultimately lead to higher rents and property prices.
Let's analyzing the data to see which states are booming and which states are not.
Fastest And Slowest Growing States
After the State and Local Tax (SALT) deductions were capped at $10,000 starting in 2018, the stats with the highest home prices began to see a deceleration in price appreciation.
States with some of the highest home prices include: California, New Jersey, Hawaii, Connecticut, New York, and Washington. A homeowner's annual property tax bill in one of these states alone could far surpass $10,000 a year.
For example, with the median home price in San Francisco at $1.6 million, the median property tax bill is roughly $18,000 a year. Suddenly, $8,000 of that is no longer deductible. Neither is any of the state income taxes paid.
Take a look at the chart below that shows the home-price growth for the 10 most expensive states and the 10 least expensive states.
As you can tell from the chart, home-price appreciation for the 10 most expensive states plummeted from a peak of around 6.6% at the beginning of 2018 to just 2.6% by 2H2019.
On the other hand, home-price appreciation for the 10 least expensive states stayed steady at roughly 4%.
The states least affected by the SALT Cap deduction include: Tennessee, Missouri, Louisiana, Oklahoma, Kentucky, Alabama, Indiana, Arkansas, Mississippi and West Virginia accord to Fitch Ratings Inc.
If you like low-volatility and steady income, then investing in the 10 least expensive states is an attractive investment.
My long-time thesis of investing in the Heartland Of America is coming true. Red states are outperforming blue states and this trend will likely continue for the foreseeable future.
Fastest Growing States With The Highest Influx Of People
As a real estate investor, studying migration trends is very important. Talk is cheap. Action is everything. When people back their bags and move, you know there is some serious opportunity.
People move to a different state mainly for a combination of job opportunities, quality of living, and cost of living. Inexpensive housing alone is an insufficient reason for moving to a particular state.
Below is some data from United Van Lines 2019 National Movers Study that shows states with the highest influx of people.
Based on the 2019 study, below are the top 15 places where Americans are moving to plus the median home price and median household income.
- Vermont – $260,000 median home price, $57,000 median income
- Idaho – $288,000 median home price, $56,000 median income
- Oregon – $364,000 median home price, $63,000 median income
- Arizona – $270,000 median home price, $59,000 median income
- South Carolina – $187,000 median home price, $51,000 median income
- Washington – $413,000 median home price, $74,000 median income
- Florida – $246,000 median home price, $53,000 median income
- Washington, DC – $629,000 median home price, $85,000 median income
- South Dakota – $206,000 median home price, $57,000 median income
- North Carolina – $204,000 median home price, $53,000 median income
- Tennessee – $187,000 median home price, $52,000 median income
- New Mexico – $205,000 median home price, $47,000 median income
- Nevada – $302,000 median home price, $58,000 median income
- Texas – $208,000 median home price, $61,000 median income
- Delaware – $255,000 median home price $65,000 median income
States With The Lowest Real Estate Valuations
It's not enough to only analyze migration trends. As a real estate investor, it's also important to analyze which states also have the best value.
In this case, value is measured by the state's median home price dividend by the state's median household income. The lower the ratio, the better the value. Please see my analysis below.
Based on the chart, the top five states with the lowest value are: Texas (no state income tax), Tennessee (no state income tax), South Dakota (no state income tax), South Carolina, and North Carolina.
It is quite interesting that the states with the cheapest real estate prices also have the cheapest home prices when compared to median household income. Although their property taxes may be higher, not having to pay state income tax is huge for higher income earners. Therefore, the smartest thing you can do as a high-income earner is to migrate to a no state income tax state you like.
The Best States To Buy Real Estate
Now that we've ranked the top states with the highest influx of people and the top states with the cheapest real estate valuations, it's time to combine the two rankings to come up with a Best States To Buy Real Estate.
After all, this is Financial Samurai, where we use analysis to make highly informed investment decisions. Our goal is to make as much money as possible in a risk-appropriate manner. And real estate is one of the best ways to build wealth and make passive income.
The below chart combines the Valuation Rank and the Migration Rank to come up with a Combined Rank for the 15 states. The lower the combined ranking, the higher the total rank.
According to my combined ranking analysis, the top five states to buy real estate based on migration trends and cheap valuations are: South Carolina, Vermont, South Dakota, Tennessee, and Arizona.
Follow The Money When Investing In Real Estate
The final analysis to determining the top states to buy real estate is to follow the money. There should be a correlation with migration trends and stats that receive the highest influx of inter-state money. Below is an analysis by Bloomberg of IRS and Census data.
As you can see from the chart above, there is indeed a correlation with the stats that have the highest influx of people and the stats with the highest influx of money. The top five states receiving the highest influx of money are: Florida, Texas, Washington, South Carolina, and North Carolina are the top five money magnet states.
Where you want to invest depends on where you currently live and have physical real estate. As an expensive coastal city resident looking to diversify his real estate holdings inland, below are my favorite five states for real estate investing.
My favorite states for real estate investing are:
- South Carolina – $187,000 median home price, $51,000 median household income
- Tennessee – $187,000 median home price, $51,000 median household income
- Texas – $208,000 median home price, $59,000 median household income
- South Dakota – $206,000 median home price, $57,000 median income
- North Carolina – $204,000 median home price, $53,000 median income
The median home price to median household income ratio of ~3.7X for these five states is attractive, especially when you compare it 8.5X in California, where I currently reside. The median home price to median income in San Francisco is actually 16.5X.
I particularly think Charleston, South Carolina is an attractive city with huge upside potential. Charleston is also CrowdStreet's #1 18-hour city to invest in for the future based on their market research. CrowdStreet is one of the best real estate crowdfunding platforms specifically focused on investing in secondary cities with higher growth, higher cap rates, and lower valuations. It's free to sign up and explore.
Because the future of work is remote, people who want to start families, buy homes, and save aggressively for retirement will continue to migrate to the tops states on my list for another generation. Thanks to technology, there's no need to stay in San Francisco and pay $4,500 a month for a two bedroom apartment.
People are rational and money always seeks opportunity. When it comes to investing, you want to have a tailwind behind your investments. Investing in a long-term migration trend while valuations are low is a powerful combination.
There is no reason why cities like Austin, Memphis, Charleston, and more can't be the next San Francisco or New York City. For those of you who are looking to invest in an eREIT, which is more diverse, but has specific geographic real estate focuses around the country, check out Fundrise. Fundrise is for all investors and are one of the most innovative real estate marketplaces around.
