Now that you've played defense and wisely refinanced your mortgage, it's time to play offense and look for real estate purchase opportunities. This post will discuss the top states to buy real estate in 2022 and beyond.
Real estate affordability is up because mortgage rates down. But mortgage rates are now creeping back up. The S&P 500 closed up another 16% in 2020 after a massive rally in 2019. In 2021, the S&P 500 closed up another 27%! Therefore, investors are wealthier overall.
Income is up and employment is recovering. Further, there is the desire to rotate into more defensive assets. The housing market should stay strong for years to come.
It's important to read Financial Samurai or other personal finance sites that write from first-hand experience. If you do, you can usually get a better sense of what's going on in real-time. With better information comes potentially better investment decisions.
For example, when I discussed only being able to find tenants for 15% less than my previous asking rent in 2017 after 45 days of aggressive searching, you could have interpreted the datapoint as evidence that expensive coastal city real estate markets had peaked and were trending downward.
We are only now seeing in the data that real estate markets in many coastal cities topped out around the end of 2017. Just know that by the time the data hits mainstream, it’s often not the best time to make a financial move.
Home Price Growth Rates Since The SALT Cap
One of the reasons why I thought coastal city real estate prices would slow was due to the new tax law that capped State and Local Tax (SALT) deductions at $10,000.
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.
Take a look at the chart below. It shows the home-price growth for the 10 most expensive states and the 10 least expensive states.
Decline In Real Estate Prices
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%. Not only has home price appreciation been more steady, but home price appreciation in the least expensive states is also now higher than home price appreciation in the 10 most expensive states. Further, valuations are much lower and cap rates are much higher as well.
If you are someone who likes low-volatility and steady income, then investing in the 10 least expensive states is attractive.
It is very clear that my thesis of investing in the Heartland Of America is coming true. Red states are outperforming blue states.
However, President Biden is now in power, and the SALT cap deduction might get lifted. One should assume that states like California, New Jersey, Hawaii, Connecticut will benefit if so. With expensive states lagging less expensive states since the pandemic began, I would pay attention to big city living again.
The Top States To Buy Real Estate By Migration Trends
In 2022, things are slightly different. To decide on the top states to buy real estate in the new decade, we should look at migration and supply trends. When people are actually voting with their feet, you know there is real 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.
Here's some data from United Van Lines 2019 National Movers Study that shows states with the most inbound migration. The heartland states are some of the top states to buy real estate.
Based on the moving study, below are the top 15 places where Americans are moving to plus the median home price and median household income. I've made the data into a chart as well.
Top 15 States To Buy Real Estate
Below are the top states to buy real estate in the new decade by migration and median home price.
- 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
Eyeball Test: States To Exclude
Although the migration data is important, it's always good to practice the eyeball test aka the sniff test. The eyeball test basically helps point out any anomalies by asking yourself whether the results make sense.
The clear surprise state on the list is Vermont at #1. Vermont is nice, but it is colder than your naked bum on a cement bench covered in ice. The largest employers are UVM Medical Center, University of Vermont, State of Vermont, IDX systems, Bruegger's Enterprises, Casella Waste Systems, and Killington Ski Resort. These companies aren't exactly fast-growing and high-paying entities.
Further, Vermont has a progressive state tax rate versus zero state taxes in states such as Texas, Nevada, Alaska, Florida, South Dakota, Washington, and Wyoming. The lowestVermont state tax ratestarts at 3.55%, then progressively bumps up to 7%, 8.25%, 8.9%, and tops out at 9.4%. These state tax rates aren't very attractive at all.
However, Vermont is #1 in migration and has a reasonable real estate valuation of 4.6X. Therefore, let's spare Vermont from omission.
Washington, DC, And Oregon
Washington state has a median household income of roughly $74,000, 17% higher than the median U.S. household income of $63,000. But its median home price of $413,000 is 69% higher than the median home price in the U.S. of $244,000. Therefore, real estate in Washington state does not seem to offer great relative value, no matter how many migrants it receives from California and no matter how high Amazon's stock price goes.
The median household income in Washington, DC is roughly $85,203, or 35% higher than the median U.S. household income. However, the median Washington, DC home price is an aggressive 158% higher than the U.S. median home price. Therefore, Washington, DC definitely does not provide good relative value either, no matter how big government gets.
Finally, Oregon, with its $364,000 median-home price (49% higher than the national average) and its median household income of $60,212 (4.7% lower than the national average), is suspect as well. Further, the weather in Oregon is similar to the weather in Washington state, not great. Although, I do like that Oregon has no sales tax and is absolutely beautiful during the fall.
The Top States To Buy Real Estate By Valuation
If you are a value-oriented investor like me, you want to not only look at the top states that are experiencing the most influx of people, you also want to see which states have the cheapest real estate valuations.
You want the SALT Cap deduction to have no bearing on home price growth. Further, you want to have as much price upside as possible. However, President Biden could eventually repeal the SALT Cap, which would be a boon for coastal states again.
Although for a specific property, it's better to value it based on its price and net operating income (NOI), for state-wide real estate valuations, it's best to use the median household income as the denominator.
Based on the chart, the top five states with the best value are: Texas (no state income tax), Tennessee (no state income tax), South Dakota (no state income tax), South Carolina, and North Carolina. Just be careful that several Texas cities like Austin are seeing large permit growth, which means lots more supply.
Top States To Buy Real Estate By Migration & Valuation
To objectively rank the states, the clear solution is to combine the migration and valuation rankings. This way, you remove biased opinions like mine who think Vermont is too cold with not enough high-paying jobs.
The chart below totals the Valuation Rank and the Migration Rank to come up with a Combined Rank for the 15 states.
According to my combined ranking analysis, the top five states to buy real estate based on migration trends and valuation are: South Carolina, Vermont, South Dakota, Tennessee, and Arizona.
Valuations & Demographic Trends Matter
In addition to understanding migration and valuation trends by state, it's also a good idea to see which states are the top money magnets. After all, more money pushes up home prices. Expensive coastal money is why people who live in lower-cost states often object to out of state buyers.
As you can see from the chart above, Florida, Texas, Washington, South Carolina, and North Carolina are the top five money magnet states.
As an expensive coastal city resident looking to diversify his real estate holdings inland, when you combine all the data, 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. However, your top five states should be different depending on where you live.
Invest Via Real Estate Crowdfunding
Because the future of work is remote, this valuation differential will be simply too great to pass up. Many workers who are armed with the skills to work remotely will. These workers who will want to start families. They will want to buy homes.
The easiest way I know how to invest in these top states is by finding commercial real estate deals through Fundrise (for non-accredited investors) and CrowdStreet (a platform focused on 18-hour cities for accredited investors).
Once the deals are found on the respective platforms, you've then got to evaluate the sponsor's track record, evaluate the deal structure, and calculate the feasibility of the returns.
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. In a future post, we'll drill deeper into specific cities.
Personally, I've invested $810,000 in real estate crowdfunding to invest in heartland real estate. I want to earn income 100% passively and diversify away from my San Francisco real estate.
As an accredited investor, I think CrowdStreet has a fantastic platform. Not only does it source high-quality real estate offerings in the heartland, it also has the occasional multifamily or build-to-rent fund. I'd check CrowdStreet out if you want to surgically invest in real estate.
