When the housing market crashed and Tarek and I were trying to figure out what we could do to make money for our family, we looked into a lot of different options before settling on house flipping. One of the options that was open to us and that a lot of new real estate investors consider is becoming a landlord. While we didn’t go this route, it’s definitely a viable way to invest in real estate and make passive income. There are just a few things that you might want to consider before you dive right in, and one of the most important of those things is which state you live in.
You already know that being a landlord can be a full-time job, but that the right property management firm can handle all of the day-to-day responsibilities for you and make it easy for you to just collect rental fees each month while you enjoy your free time and look for other investment opportunities. What you may not know is that your state’s laws could hold you back from making a decent income with investment rental properties.
For example, RealtyTrac recently performed a study of the best and worst places to be a landlord in the US. Unsurprisingly to me, most of California ranked “poor” or “average”, especially in southern California. Tarek and I found this out when we decided to make a career move in 2008; we did a lot of research, and it looked like becoming landlords was not going to work out in our favor.
If you’re really interested in rental property investments, you should know that most states fall into one of two categories—they’re either tenant-friendly or they’re landlord-friendly, and there doesn’t seem to be any in-between.
Landlord-Friendly States vs. Tenant-Friendly States
Tenant-friendly states tend to have a lot more fees and fines associated with registering your property as a rental, keeping it up to code, and other legal details. Plus, they have longer waiting periods for evictions and more difficult processes that you have to follow to get rid of a tenant.
In a landlord-friendly state, though, you won’t have to worry as much about all that. For example, Texas is a really landlord-friendly state. Failure to pay rent here can result in a very fast eviction, so you won’t get stuck with deadbeat tenants if they refuse to pay what they owe you. South Carolina—and Charleston in particular—is another great place to be a landlord, as annual gross rental yield is 10%, and the average rent on a three-bedroom home is $1160 per month.
Like California, Oregon and Washington are predominantly tenant-friendly and don’t get very good returns on rental rates. However, if you’re lucky enough to find a good rental property in Pacific County, Washington, you may be able to look forward to a 15% annual gross rental yield. In general, though, the rental markets on the west coast leave a lot to be desired, and it’s usually a better idea to invest in fix-and-flip houses that will give you an immediate return on your investment instead of hoping for a good rental market and a long-term return.
There’s absolutely nothing wrong with investing in fix-and-hold properties, but if you’re going to go this route, you should be aware of the legislative and market forces that could be working for or against you. Get to know your area and its market needs, and then make an informed decision on what kind of real estate investment business is best for you.