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Location, location, location is one of the most common mantras in real estate. After all, a beautiful property in the middle of nowhere isn’t going to attract the same kind of opportunities as that same building in the middle of a thriving and exciting metro area.
Both properties might be a good option for the right investor, but you need to know what to expect from each before you buy in.
The same principle applies when it comes to the larger scale of location, and the state the property is in.
Sometimes it might be to your advantage to buy in and develop real estate in an under-developed area or a low-demand state, but more often you’ll end up getting a lower return on those investments than if you’d chosen a better location.
So, here’s what you need to know about the best states to invest in real estate in 2023, and why you need to choose the state you’re investing in carefully.
Why Does Location Matter In Real Estate Investment?
Some investors think that if you have a good investment that meets a need in the local area, people will come to you. And, in fairness, sometimes that’s true.
Plenty of people want to own their very own woodland mansion, for instance. The remoteness of the location is part of the appeal in that kind of situation.
But your potential profits in real estate investing really do hinge on your ability to evaluate the profit potential of a given location as much as the actual properties themselves.
Think about the difference for a retail location between being on a popular Main Street in a growing town, with plenty of other exciting retail and service businesses on either side, compared with the same kind of property located in the middle of a dying residential area that’s hard to navigate and doesn’t get a lot of foot traffic.
Very different potential, right?
Well, the same thing applies to states as neighborhoods and cities. Choosing the locations with good profit potential, high demand, and balancing those qualities with local restrictions and taxes is a huge part of creating a successful real estate investment strategy.
What Factors Should You Consider Before Choosing Which State To Invest In?
When you’re choosing a state to invest in there are a lot of things to consider, and sometimes the deciding factor is going to be individual. For instance, if you grew up in small-town Idaho, you’re going to have a personal connection to the properties there that might help you sell them.
Think about those kinds of advantages and factors too, while we talk about some of the more universal considerations. It may be that your best investment opportunities are going to be where the other investors aren’t looking. Or it might be that your best investments are going to be in the areas of high opportunity we’ll discuss in a moment.
In the meantime, here are some of the universal considerations you should take into account before choosing a state to invest in.
It’s also important to keep in mind that the best investments often come with the highest costs. Other investors are going to see at least some of the same opportunities you do, and you don’t necessarily want to get into a competition for every property. Think about balancing opportunity with opportunity cost, and how you can leverage a given location into bigger profits with the right investment strategy.
Local Rental Occupancy Rates
One of the biggest things you should consider before investing in any state is the rental occupancy rate for that state, and even for the individual towns and cities you might consider investing in.
The higher the occupancy rate the easier it should be to find qualified tenants for your properties in that area. High occupancy rates also tend to mean a lower risk of tenants defaulting on their lease, leaving early, or having a unit go vacant between tenants.
There is a simple formula to calculate the vacancy rate on individual properties, which most investors know and use for their properties, but the larger trends in an area are just as important.
Cost Of Mortgage Vs. Rental Income
The cost of acquiring a property, compared with the amount you’re likely to make while owning it, is an important consideration in any area, but it can be especially important in states with high real estate costs and, conversely, in states with low property values.
That’s because the more you have to pay to get a property, the more you need to reasonably make per month to get that money back in a reasonable time.
On the other hand, a low property value might also indicate an area that’s got a high vacancy rate, where it will be harder to find the tenants you need. At the same time, you can charge less in rent to still make a reasonable ROI if your purchasing costs were lower.
Tenant Default Rate
The rate at which tenants default on their leases in a given area should be as low as possible if you’re going to invest there.
This isn’t just a matter of securing your monthly income, it’s also about how consistently a given property will perform once you own it. Consistency is often more important than profits, in that a high consistency but low-profit property will still usually perform better over time than a high-profit property that has very low consistency.
Proximity
Your personal proximity to a given property might not matter very much if you have a local property manager you know and trust to take care of the property, but it can be more important if you’re going to manage the property yourself, or if you need to physically inspect the property for any reason.
Not all investors invest close to home, but the more distant you are the less direct control you’re likely to have over a property. Think about how far away you’re comfortable with owning property, and whether you would rather have a location-diverse portfolio, or a stronger real estate presence in specific areas. Both strategies have their own advantages.
Economic Growth
Paying attention to the economic trends in a given state can also give you insight on what the real estate market will do in that area, and the potential opportunities you can grab there.
Remember, economic conditions are just one factor in a successful real estate investment. There are downsides and opportunities to areas that are growing, shrinking, and staying roughly the same from an economic (and population) perspective. You just need to know how to leverage your investment to make the most of conditions.
Desirability
The desirability of a state might be best described as how good it is to live there. When people love the place they live they are generally more willing to spend to stay there, while people who really dislike their area are more willing to pay to get away than they are to pay rent and stay.
Thinking about the desirability of a state, city, town, or even a specific neighborhood can make the difference between a great investment strategy and an only okay strategy.
The Best States To Invest In Real Estate In 2023
Now that you know a bit more about how location impacts real estate potential, let’s look at the 7 best states to invest in real estate in 2023.
Florida
Florida is full of investment opportunities right now, and we probably don’t need to tell you that if you’ve been looking into real estate investment for any length of time.
For one thing, Florida is a high-demand market, rental prices are high, homes can usually be flipped for more than they cost, and the average ROI on real estate investments is good regardless of your specific strategy.
Delaware
Delaware might be a more surprising choice, but the state offers a reasonable rate of return on investment and plenty of opportunities for a canny investor, at a lower average cost than a lot of the best investment states.
Delaware is small but growing, and rental demand is consistent and rising. The economic situation is generally good, but many state residents are still renting, which means lots of opportunities for long-term real estate investors.
California
California is one of the largest states in the country, both in land area and in population. That means there is a huge demand for rental properties there, as well as a large inventory. What does that mean for investors? A lot more selection so you can choose the perfect property for your investment strategy.
Unfortunately, there are some downsides. One major consideration before buying properties in California is that local laws tend to heavily favor tenants, and rent control is state-wide.
Connecticut
Connecticut is another good state for long-term real estate investors, even though it’s a relatively small state. Connecticut boasts a strong economy and has a huge hospitality market that can be leveraged to make the most of the many vacation properties in the state.
Hospitality is also just coming back as we head into 2023, which means there are plenty of suitable properties available, and demand is likely to increase.
Local laws also ban rent control, which gives landlords the freedom to price properties however they choose.
Colorado
Colorado is another great state if you’re looking for rental properties. High home prices mean that a lot of local residents rent instead of buying, while low property tax rates make buying a better prospect for investors.
The biggest drawback here is that all properties are going to be more expensive compared with other states. That said, the economy is diverse and growing, and local legislation tends to favor landlords, and there is a ban on rent control in the state, so you’re free to raise rental rates when you need to.
New York
New York is another expensive but promising market. Rentals in particular are always in demand, and high wages mean that New York landlords can generally charge rates reasonable in relation to the higher cost of ownership.
New York’s population also tends to be growing, highly educated, and otherwise desirable tenants for rental properties.
However, like California, New York’s local legislation is tenant-friendly rather than landlord-protective.
Texas
Texas is another market where there are a lot of opportunities as we head into 2023. Prices tend to be high, and the thriving economy around Texas’s major metro areas mean that wages are high and getting higher, and more people are likely to be moving to the lone star state in the future.
However, Texas’s housing inventory is low, which means that properties in this state can be competitive, and you will likely pay more for the opportunities that exist here. A selective investor who knows the area and can tell good investments from marginal opportunities will thrive in this market.
Looking To Start Investing In Real Estate?
If you’re ready to start investing in real estate but want more advice than we can offer in a single article, schedule a consultation with Teifke Real Estate. We can help you find the perfect property, provide investment advice and strategy tips, and offer coaching and management services to investors of all stripes.
Source:
- Merrill T. Location: The most important factor in real estate. FortuneBuilders. https://www.fortunebuilders.com/location-important-factor-real-estate/. Published June 25, 2015. Accessed January 16, 2023.
- Rohde J. What is the vacancy rate & why is it important to investors? Learn Real Estate Investing. https://learn.roofstock.com/blog/vacancy-rate. Published October 13, 2021. Accessed January 16, 2023.
- Struyk T. The factors of a “good” location. Investopedia. https://www.investopedia.com/financial-edge/0410/the-5-factors-of-a-good-location.aspx#:~:text=Location%20is%20key%20to%20valuable,well%20as%20plans%20for%20development. Published June 29, 2022. Accessed January 16, 2023.
