As a savvy real estate investor, it's always good to look for states with the cheapest real estate valuations.
In the past, it was very difficult to invest in real estate in different parts of the country. Only high net worth individuals or institutional investors were able to invest in various commercial real estate projects.
Today, with real estate crowdfunding, individual investors can easily invest in states where they see the most value. After the 2012 JOBS Act past, the government made investing in commercial real estate deals much easier.
The states with the cheapest real estate valuations are mostly clustered in the center of America.
Why Invest In States With Cheaper Real Estate
First, it's important to explain why it's probably best to invest in states with the cheapest real estate valuations. After the State and Local Tax (SALT) deductions were capped at $10,000 starting in 2018, states with the cheapest real estate valuations started to outperform.
Lower valuation states didn't get as negatively affected by the SALT deductions cap because many homeowners in these states don't pay property or state income taxes that exceeded $10,000. Therefore, the cap was mute.
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. If the homeowner made $150,000 and paid $10,000 in state income taxes, $10,000 is no longer deductible.
But if you owned a home in Tennessee for $250,000, your tax bill might only be $4,000. If the owner makes $150,000, he doesn't pay any state income taxes either. Therefore, the homeowner is not negatively affected.
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 cheapest states stayed steady with roughly a 4% YoY appreciation. Meanwhile, the 10 most expensive states saw a drastic decline in home prices from 6.6% to 2.6% by the second half of 2019.
You want to invest in the cheapest real estate valuations are not negatively affected by the SALT tax deduction cap. Further, Trump is pro-red states, which all tend to be the states with the cheapest real estate.
States With The Cheapest Real Estate Valuations
It's not too hard to figure out the states with the cheapest real estate valuations. I measure valuation by dividing the state's median home price dividend by the state's median household income. The lower the ratio, the lower the valuation. Please see my analysis below.
Below is the data ranked by Price / Income. We'll talk about the Migration Rank in the next section.
Based on my analysis, the top five states with the cheapest real estate valuations 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.
States With The Highest Employment Growth Rates
Let's also look at the states with the highest employment growth rates below.
The states with the highest employment growth rates are in dark. They are: Utah, Colorado, Idaho, Montana, North Dakota, Maine and Vermont.
States that have the highest employment growth rate have job growth and wage pressure. The higher the job growth and wager pressure, the more pressure is exerted on rents and property prices.
Below is some data from United Van Lines 2019 National Movers Study that shows states with the highest influx of people.
Notice how the data on migration and job growth are quite tight. Jobs are everything for income growth and real estate price appreciation.
Below are the states with that have seen the highest influx of people. I've included the median home price and median 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
Invest In The Cheapest States
Now that we've ranked the states with the cheapest real estate valuations, it's a good idea to cross-analyze the states that also have the highest influx of people.
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, Arizona, Idaho, Texas, North Carolina, Florida, Oregon, New Mexico, Washington, Delaware, Washington, DC, and Nevada.
Invest In Cheapest States With The Highest Growth
A smart real estate investor invests in the states with the cheapest valuations with the highest employment growth. With these two tailwinds, making winning real estate investments should be easier.
Personally, as a property owner in San Francisco, California, where real estate valuations are extremely expensive, I'm all about buying property in the heartland of America.
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.